Insights to help navigate market volatility and economic impact
amid the COVID-19 pandemic
"This is an extraordinary period, both a health and an
economic crisis that is unprecedented in financial history."
"The key point, given the uncertainty of the economic path, is portfolio construction has to be built on a solid foundation. You want to make sure that the number-one building block of your portfolio are securities that can endure a sustained period of economic weakness, should it become the case, but can also benefit should you get a recovery in a shorter period of time."
–Western Asset CIO Ken Leech
Market Impact of COVID-19
Both the US and global economies entered the crisis with strong fundamentals.
The US economy is well positioned to weather a temporary economic slowdown, especially considering the Fed’s swift policy response and the $2 trillion fiscal stimulus under the CARES Act that authorizes payments to individuals beginning in mid-April 2020.
A resumption of economic activity could come swiftly.
This experience is not the same as the global financial crisis (GFC); while the timing of the voluntary business shutdown is still unknown, we believe the global growth shortfall will be transitory. Currently, we see a U-shaped recovery with the resumption of economic activity commencing in late 2Q20 and 3Q20, then picking up steam in 4Q20. We hope to be back to trend-line growth as we enter 2021.
Public safety will be balanced with economic pain.
While business closures and social distancing are intended to save precious lives, the near-term economic impact may be very painful. The massive efforts already seen by governments and central banks to provide fiscal and monetary stimulus should help mitigate some of the economic damage.
Our base case calls for a resumption of economic activity—as social distancing and work restrictions are lifted—beginning in late 2Q20, then picking up steam through the end of the year, and reaching trend-line growth in early 2021. The blue line shows alternate scenarios given the uncertain outcome; our latest outlook is most closely aligned with the middle upward sloping blue line.
We expect the economic impact of COVID-19 to be swifter and deeper than what was experienced over a decade ago during the GFC, but we also see a faster turnaround and resumption of beneficial economic activity once the virus is contained.