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Truncated Recovery but Stocks Will Thrive

Truncated Recovery but Stocks Will Thrive
(Aleksandr Tannagashev/Dreamstime)

By Tuesday, 05 May 2020 08:04 AM Current | Bio | Archive

Don't expect a V-shaped recovery, but prospects for stocks are better than for the overall economy.

Reopening crowded theaters, schools and air travel with passengers seated cheek-to-jowl risks reigniting the epidemic. Businesses may go to considerable expense to make more essential activities like food-processing plants safer, for example, by installing shields between employees but other less-essential activities will come back more slowly.

A second wave of infections is more likely when an effective vaccine is not yet widely available and the population is initially shielded through social distancing. For now, authorities should rely on testing to identify new infections and those immune, quarantining and tracing or personal surveillance.

Cell phones with Bluetooth-enabled apps could log our personal contacts and movements to enable quick identification of those exposed to newly infected individuals. For the time being, though, local governments mostly will rely on armies of tracers — folks that interview the newly infected about their recent associations.

Americans may balk at cell phone tracking owing to privacy concerns but as it becomes an option, it should be quicker and more effective. Google, Facebook, Twitter and cell-phone companies already collect data that is used to place ads on our web searches. I trust politicians a lot more with my private information than most high-tech CEOs — they are less insular and subject to better oversight and removal.

We can't afford not to trust the government. If the economy stays mostly closed through May, unemployment — measured and hidden — will likely jump above 20% and that implies a $5 trillion-plus drop in economic activity. Federal loans to businesses that don't convert to grants and private borrowing are creating a mountain of debt similar to the financial crisis.

All that will radically limit consumer spending, business investment, and state and local government budgets for the next several years. And if we wait until we have reliable, widely available effective treatments and vaccines, the economy could be so damaged that we relive the Great Depression.

The shutdown is closing some businesses permanently — small businesses being less diversified and generally having less financial ballast are more vulnerable.

More folks who visited restaurants after tough days on the job have discovered delivered meals, creating opportunities for virtual restaurants in industrial kitchens. Twenty-five percent of sit-down eateries now closed may never reopen.

Zoom is hardly perfect but overloaded servers and security vulnerabilities can be fixed, and businesses have discovered they can get along without subjecting employees to quite so much commuting and air travel.

This whole episode has accelerated the growth of Amazon, Walmart and Target at the expense of conventional brick and mortar, the advent of machine and software robots, widespread telemedicine and education, watching movies and working at home, and the retreat of automobiles.

The Coronavirus Aid, Relief and Economic Security Act might have better been labeled Project Brigadoon, because it emphasizes subsidizing businesses to maintain pre-existing payrolls, union contracts and the like. That implicitly assumes the economy can be reawakened to its prior condition in February.

Unemployment benefits that exceed weekly pay encourages larger companies to lay off employees and for those workers to wait for old jobs to return, but many businesses are permanently closed or scale backed. Many loans the Treasury, Small Business Administration and Federal Reserve have underwritten will fail, and grants to keep workers in place will prove wasted.

Many department stores are through — either chains will close forever, or the number of outlets downsized. Malls without anchors will not attract enough traffic for smaller tenants, and temporary closures are encouraging clothing and other brands to rely more on direct to consumer sales.

The viability of mall owners and their creditors will be impaired-just like those who extended credit to Neiman Marcus and other big chains.

Big tech is doing well — Facebook, Amazon, Apple, Netflix and Google — and many are or will be hiring. They dominate large-cap stock indexes like the S&P Macy's and J.C. Penney, for example, are not on the S&P 500 because of low valuations.

The recovery will look like a truncated V. After a sharp decline, a steep recovery but not to the same level as before. The stock market, as measured by indexes mostly dominated by big-cap stocks, will recover more quickly.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1

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Tuesday, 05 May 2020 08:04 AM
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