Talk of a recession has been swirling for months as the U.S. stock market’s bull run sped further into its second decade. That chatter took on a life of its own as coronavirus began to spread across the world, causing business disruptions and spooking investors.
It’s the reason the stock market plummeted last week and why investors are in for a wild ride in the weeks to come.
It’s also why the Federal Reserve just cut interest rates by half a percentage point. The emergency move was the first time the Fed reduced rates since December of 2008 during the Great Recession.
Despite the similarities in moves by the Fed then and now; the earnings warnings out of corporate America; and a huge decline in the Dow Jones Industrial Average last week, a “coronavirus recession” should be short-lived. Nor should it look remotely like the one we lived through 12 years ago.
Unlike the Great Recession of 2008 and 2009, this time around it’s a lack of supplies that are hurting economic growth, not demand. Once coronavirus is contained and people are moving freely, the economy should pick up. Sure there will be some near-term pain, but only for a quarter or two.
That’s the message emanating from Foxconn, Apple’s (NASDAQ:AAPL) main iPhone assembler. Foxconn said this week it expects production to return to normal by the end of the month.
For the quarter that ends in March, Foxconn did warn there will be a “significant” year-over-year impact because of coronavirus. That same scenario could play out across the markets. Companies warn of the short term pain but remain optimistic about the future.
In order for a coronavirus-induced recession to be as deep and severe as the last one, the outbreak would have to cause a full-scale financial crisis.
That occurs when there is excessive debt as financial conditions tighten and companies sit on inventory they can’t unload. Layoffs and foreclosures are common during severe recessions.
That’s not the case in the current economic environment. U.S. businesses aren’t dealing with excess inventory, and consumers aren’t out of work.
Jurrien Timmer, director of global macro at Fidelity Investments, predicts coronavirus will push us into a so-called technical recession rather than a real one. In a technical recession, there is one or two quarters of negative GDP and earnings growth but little in the way of layoffs.
“While the ‘R’ word would certainly grab headlines and could make people even more worried that the party is over, my sense is that the stock market will look through this and that the price and valuation (and earnings) reset will be a one-off event,” wrote Timmer in a blog post.
Then there’s the Fed’s surprise move to cut rates by half a percentage point.
Fed Chairman Jerome Powell said at a press conference that the bank was responding to the impact coronavirus was having on the outlook for the economy. He did note the economy remains strong in the face of coronavirus.
President Donald Trump has called for even more in the way of interest rate cuts.
Cutting interest rates alone may not be enough, but it does create more time to figure out what needs to be done to curb the negative impact coronavirus will have on the global economy. It also serves to calm investors who were expecting action out of the Fed.
Timmers of Fidelity said the markets are pricing in three to four interest rate cuts this year.
Barring a massive outbreak in the U.S. that can’t be contained, coupled with an accelerated spread in China and Europe, the “coronavirus recession” should be a short one, not a repeat of the painful Great Recession.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
Last modified: June 24, 2020 1:03 AM UTC