The longest-running bull market and economic expansion in American history are under siege from a one-two punch that few saw coming.
First, the coronavirus pandemic slammed a world economy already hobbled by trade wars, crushed the travel industry and sparked fear among American households and CEOs alike. Cruise ships, airlines, hotels, sporting events and concert halls are all in the line of fire.
Then, oil prices suffered an historic collapse that threatens to set off a wave of US bankruptcies and layoffs in the energy sector, further denting business spending.
Now the Federal Reserve and the White House are racing to stave off economic disaster by pumping in more easy money and pushing for further tax cuts.
They might be too late.
“If we do not see a substantial drop in the spread of the virus or its mortality rate within the next few weeks, the US economy will go into recession,” David Kelly, chief global strategist at JPMorgan Funds, told CNN Business.
Larry Summers pegs the chances of a US recession at 80%. The former US Treasury Secretary, speaking to Bloomberg News, urged Washington to prepare a massive stimulus package to revive the economy.
That could spell an end to the bull market, which marked the 11th anniversary of its start Monday by teetering on the brink of a bear market. It was Wall Street’s darkest day since 2008. (A bear market is is defined as a 20% decline from previous highs.)
The S&P 500 briefly dipped into bear market territory Wednesday during another ferocious day of selling. And the Dow officially finished in a bear market, ending that index’s 11-year bull run.
Goldman Sachs says slowing business activity will crunch corporate profits, dealing a fatal blow to the bull market.
“After 11 years, 13% annualized earnings growth and 16% annualized trough-to-peak appreciation, we believe the S&P 500 bull market will soon end,” Goldman Sachs equity strategists wrote in a report to clients Wednesday.
Of course, history could eventually record that a recession in the United States is already underway. Then again, a downturn might be avoided if the economy proves more resilient than expected.
The jobs market looked robust only weeks ago, giving the US economy momentum heading into this crisis. The United States added a strong 273,000 jobs in February – the biggest one-month gain in nearly two years. Even the battered manufacturing sector showed signs of life.
The economic expansion that began in June 2009 has survived countless scares, including the US-China trade war, Japan’s catastrophic tsunami and earthquake and the European debt crisis – not to mention the near bear market of late 2018. Each of these scares slowed the economy, but not enough to spark an outright recession.
A $200 billion hit to the economy – all at once
Now some economists predict the economy will almost certainly succumb to the enormous pressure from the coronavirus, which has forced the shutdown of Italy’s economy and is decimating the airline industry.
JPMorgan’s Kelly pointed to the sharp pain in the travel industry and the “social distancing” effect of the health crisis. His firm made very rough estimates of the impact of the coronavirus that include a 50% drop in cruise bookings, 25% declines for airlines, hotels, sporting events, concerts and theaters and a 10% dip in restaurant spending.
If all of that hits at once, Kelly said such a scenario would cost the US economy nearly $200 billion and subtract almost 4% from annualized real GDP growth in the second quarter.
“The worst is yet to come,” Joachim Fels, global economic advisor at PIMCO, told clients on Sunday.
The firm, one of the world’s largest asset managers, warned of a “distinct possibility” of a technical recession in the United States, defined as two consecutive quarters of negative growth. PIMCO joined other firms by saying the Federal Reserve will have to slash interest rates back to zero and re-launch its 2008-era bond-buying program.
Warning lights are flashing
And that warning came even before chaos descended upon the oil markets. Russia’s refusal to cut production prompted a ferocious response from Saudi Arabia, which vowed to flood the market with excess supply.
The ensuing oil crash, the worst since 1991, slammed energy stocks and will force shale oil companies to abandon projects, slash dividends and lay off workers. Some shale oil companies won’t survive the carnage.
Although cheap oil will benefit American drivers and airlines, the impact to GDP has shifted over the years now that the United States is the world’s largest oil producer.
“The coronavirus and the oil market disruption may prove to be the exogenous shocks that end this elongated cycle,” Kristina Hooper, chief global market strategist at Invesco, wrote in a report Tuesday. “Our end-of-cycle-dashboard signals are flashing.”
It’s worth noting though that a bear market and recession do not necessarily mean a repeat of 2008. That severe downturn was marked by a near-collapse of the entire financial system. The S&P 500 lost more than half its value and the unemployment rate spiked to 10%.
This time, there is hope that a recession would be shorter and shallower, especially if the coronavirus outbreak is soon contained.
“There’s no reason the US economy can’t recover in 2021,” said JPMorgan’s Kelly.