Recession Is Likely Over, Big Questions Remain

 It seems highly likely that the U.S. recession is over. However, it’s not all great news and the markets are looking past it.

The U.S. markets have rallied for various reasons. A potentially short recession is part of it. However, the $3 trillion of stimulus applied to the U.S. economy has been important too, as has the tailwinds for many mega-cap stocks within the index such as Microsoft MSFT +0.1%, Alphabet (Google), Apple AAPL -0.1%, Facebook and Amazon AMZN -0.4% . These companies have seen trends within the pandemic that have helped their businesses as tech becomes more important in a socially distanced world. Yes, many more firms in sectors from travel to bricks and mortal retail have hit real problems, but their index weight is a lot smaller. Since the index is driven more by the tech names with large weightings, they have more of a say in driving the stock market than they do in impacting the U.S. economy.

 

It is good news that the economy is likely now on a positive trajectory. However, we’re starting from an extremely low base on that upward journey when compared to most recessions in history. The gap between the recession ending and things being back to normal is unusually stark. That’s causing some economists to call this a depression, reflecting the fact that large numbers of people are still out of work even as things start to move up. Plus, of course, the recession may be over, but the pandemic still remains.

 

The 2020 recession has been unusual in many ways. The good news is the recession is likely technically over, but the drop in output has been so severe that getting back to the levels of activity we saw in late 2019 is likely to take years. Recent recessions with similar levels of unemployment, suggest that could take around 6 years, though a quicker rebound as the pandemic recedes may accelerate that. A further challenge for investors is that while the economy has fallen substantially, the markets are broadly flat for the year and valuations remain elevated on many measures. That’s another unusual component of the 2020 recession.