The contrast could not be more stark. On the one hand, the financial fallout from the COVID-19 pandemic has ground some sectors of the global economy to a complete halt, and a record 6.6 million Americans filed for unemployment benefits last week.
On the other hand, St. Louis Federal Reserve President James Bullard has compared today’s economy to a well-tuned car that has been simply temporarily slowed by traffic conditions. U.S. Treasury Secretary Steven Mnuchin went so far as to describe the unemployment numbers as “not relevant.” And Larry Kudlow, director of the U.S. National Economic Council, said he believes the economic pain will be short-lived.
Aside from how tone-deaf Mnuchin’s comments surely sounded to any of the millions of people for whom unemployment is all too relevant right now, the ease with which he, Bullard, and Kudlow believe the economy can be put it together again after such a great fall is striking. To a casual observer, it looks like “all the king's horses and all the king's men” couldn’t possibly do the job, at least not quickly.
It’s how you frame the problem
It has often been observed that the economy and the stock market are not one and the same. They do not move in lock step. We have had bear markets without recessions and we have had recessions without bear markets. In fact, according to Barron’s, one-third of bear markets have occurred without recessions and one-third of recessions have occurred without bear markets.
While the current bear market is moving very much in lockstep with economic indicators normally associated with a recession, such as a slowdown in business activity and high unemployment, St. Louis Federal Reserve President James Bullard argues that this economic era should not be labeled a recession. Whereas a recession is an ordinary slowdown in economy activity that marks the end of a normal business cycle, Bullard contends that’s not what’s happening now.
“This is a planned, organized partial shut down of the U.S. economy. We are throttling back output on purpose to meet health guidelines.”
Bullard compared today’s U.S. economy to a well-functioning car traveling down a highway at 70 miles per hour that suddenly needs to slow down for a construction zone.
“Once you come out on the other side, they give the all-clear and you can speed up again. There’s nothing wrong with the car itself.”
Staggering problems, staggering relief
In the face of today's seldom- or never-before-seen economic issues — the potential for a 30% U.S. unemployment rate (three times that seen during the Great Recession, and more than was seen even during the Great Depression), one-quarter of the U.S. economy idled (“There’s nothing in the Great Depression that is analogous to what we’re experiencing now,” according to Mark Zandi, chief economist at Moody’s Analytics) — the government is infusing the economy with never-before-seen levels of financial support. The $2 trillion CARES Act includes $300 billion of cash payments to individuals and families, $260 billion in extra unemployment benefits, and hundreds of billions more for small business grants and loans.
Here again, Bullard says to be careful about what you call that. It is not, in his view, an economic stimulus package.
“Many people may not want to fly out of caution or be able to dine out because of legal decree. The goal of macroeconomic policy, at this stage, is not to ‘stimulate’ them to do these things. Rather, at this stage, macroeconomic policy could be better described as maintenance and support, more a matter of insurance than stimulus.”
Whatever you label the massive economic infusion, Mnuchin hopes it means many of those who have lost their jobs recently will be hired back fairly soon. Bullard says July 1 is a reasonable time to take the country’s economic temperature. And Kudlow believes the economy could begin to bounce back even sooner, perhaps in the next four-to-eight weeks.
The lessons of history
Over the past 60 years, it has taken an average of around 26 months for the market to recover from a bear market low to its previous peak. But every bear market is unique — this one, especially so. The speed with which it developed was, by far, the fastest ever. Its cause has no benchmark. And we obviously don't know if the low is already behind us or still awaits us at some point in the future.
As I’m writing this article, the market is in rally mode. Is it just another of the short-term rebounds that have marked so many of history’s bear markets — a "bull trap" that creates nothing more than false hope along the way to the market’s eventual bottom? Or, after a painfully sudden slowdown to navigate a uniquely troubling construction zone, have investors already caught a glimpse of that wonderful “End Road Work” sign just ahead?
Time will tell. And more importantly, the momentum numbers will tell us when it’s safe to speed up again.