It’s a process

   By Guest Blogger Ryan Lewenza

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I’m a big baseball fan having played it for years when I was a young punk. As an extension of this, I love watching baseball movies like Bull Durham, The Natural, Major League, and my all-time favourite, Moneyball. I think that one’s my favourite since it combines two of my passions – baseball and statistics.

One particular scene from that movie that resonates with me right now and that is germane to the pandemic and recession, is the scene when Billy Beane, the coach of the Oakland A’s, and played by my doppelganger Brad Pitt, repeated over and over to his ballplayers that “it’s a process, it’s a process”. He was trying to get his team to buy into his new strategy and kept hitting home that “it’s a process”, and that his players need to be patient and wait for their pitch or opportunities to come to them.

Well, this pandemic and global recession is going to be a process too, and just like every other recession before, this one too shall pass. The only question is when and how meaningful the recovery be.

Today I review this process of how economies move from recession back to recovery, and outline my expectations of this process over the next 12-18 months.

To understand why recoveries are a process we need to start with a review of the business or economic cycle.

The business cycle tracks the changes in economic growth or activity over time. Specifically, it tracks fluctuations in things like production, trade and economic activity and essentially captures the evolution of an economy from boom to bust. In my opinion, it is one of the most important things to track as it has huge implications for economic growth and the financial markets over time.

There are four basic phases of the business cycle. First, is the expansion phase and is characterized by rising employment and GDP growth, and generally, rising prices. Second, is the peak, which is the highest point of the cycle and where the economy is operating at full capacity. Third, is the contraction phase (where we’re currently in), which is where the economy contracts, job losses mount, and deflationary pressures come out. Finally, the last phase is the recovery phase, where the economy has bottomed and is beginning its next upswing. Then rinse and repeat over time.

The Business Cycle

Source: Model Investing

While every recession/contraction is different, the three main causes of economic recessions are rising interest rates, the end of credit/asset bubbles, and exogenous shocks such as wars and oil spikes. The current recession was brought on by a historic global pandemic, which would fall into the category of exogenous shocks.

Our focus, however, is now on the recovery and how economies transition from contraction to recovery. The key factors that help lead to a recovery are lower interest rates/stimulus from central banks and rebounding confidence among consumers, investors and the business sector.

I can’t stress enough how important improving confidence is to a recovery. Take right now for example. In March we were all scared senseless, focusing on TV and media headlines regarding COVID and the steep declines in the stock market. But now people are starting to feel a bit more at ease. As the economy begins to be re-opened, and infection rates peak, confidence will slowly start to recover, leading to ‘animal spirits’ coming out and a recovery.

Now it’s not a straight line and there are going to be setbacks along the way as it takes time for confidence to be repaired.

Below are some interesting charts to help hit home my point. The keys to every recovery are new jobs being consistently added and improving consumer confidence. If people are more confident and they have a job they spend more. If on the aggregate, consumer confidence is low then they save more. That’s exactly what’s happening right now.

So in the charts below I chart those two indicators in the US (total people employed and consumer confidence) for the last four recessions. The time period for each recession measures from six months before the start of the recession, and the subsequent two years after each recession.

While every recovery is different, the charts clearly show that over time you start to see rebounds in employment and consumer confidence. In 1981 for example, the recovery in both were fairly quick following the recession. And in 2001 the recovery took a bit longer, but the outcome is always the same.

As I said before, the question is not if the US/global economy will recover from this global pandemic and recession, but rather when, and by how much.

I believe the second quarter will be an absolute disaster for economic growth, but that this could represent the low in this contraction phase. Then as the economy begins to be re-opened, we should see a bounce back of activity in the second half of this year.

I’m not sure if it’s going to be a V, U or W-shaped recovery, but I believe strongly there will be a recovery and that by 2021 the US/global economy could be well went into its next expansion phase. Why? Well, this is how recoveries work. It takes time to rebuild confidence and see a rebound in the labour markets. Second, the central banks around the world are injecting unprecedented stimulus (in the trillions!) into their economies, which I believe could help lead to a stronger recovery then many people are currently anticipating.

Yes it’s going to be a bumpy ride, and were not through this contraction/recession yet, but try not to lose the forests for the tress and recognize that we’ll get through this tough time as history has clearly showed us time and time again that we do recover from these downturns and that its just “part of the process.”

US Economic Recoveries Following Recessions

Source: Bloomberg, Turner Investments (Click to enlarge)

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.