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The Road Out of Uncharted Territory

STRATEGAS' Economic Outlook

These have been very challenging times for all Americans, but here at Strategas, one of the challenges we've been facing is this: Simply put, we have never seen an economic landscape like this. As an economic forecasting and investment advisory firm (and a wholly owned division of Baird), it is our task to make sense of what's happening to our economy, and help provide a path forward for our client base. We have long provided our expertise to some the world's largest sovereign wealth funds, mutual funds, hedge funds, pensions and endowments. But now we're in uncharted territory.

As we as a nation have faced this unprecedented crisis, isolated and without our customary support, any circumstance beyond our control can present seemingly insurmountable odds. On the other hand, crises can remind us of the power that collective energies and community spirit can have in overcoming any obstacle. That's true of not just the medical issues that the pandemic has presented, but the societal and economic issues as well.

Without dismissing the very real human health tragedy that COVID-19 has wrought, investors must also recognize its financial costs. Many traditional economic data series are registering some of their worst readings … ever. In the first quarter of 2020, America's GDP declined by 4.8%, the worst figure we've seen since the Great Recession. We lost more than 20 million jobs in April, the highest figure on record. Corporate profits are showcasing sharp declines.

While these economic impacts resulted from public health directives aimed at mitigating the impact of the virus, they still cause investors no shortage of anxiety. The natural reaction for most investors is to let these near-term uncertainties cloud our longer-term objectives. The need to fight against this tendency underscores the importance of holistic wealth planning and value of the deep relationships we form with our advisors.

If there's some good news to be found, it's that investors seem to have latched on to modest improvements on the health front (i.e., flattening the curve and lowered worst-case projections) and the unprecedented actions taken by policymakers in backstopping the economy to drive shares off their late-March lows. The combination appears to have moved the consensus to quickly dismiss the worst of 2020 and embrace the potential for better in 2021. At this point, GDP looks to be on track to decline by 5.4% in 2020, but our initial forecast for 2021 sees it rising by 2.0%.

There are some unusual indicators to watch for that might signal the economy returning to full strength. The TSA Total Traveler Throughput, for instance, collapsed in March of this year; when it rebounds, that will be a good sign for our economy. At a more local level, keep an eye on the number of OpenTable Reservations.

While it is possible that a "white swan" health event could offset the "black swan" pandemic, it is difficult to base investment decisions off the potential for such events. Policy has likely bought us some time. The developed economies have been aggressive, and the size of fiscal stimulus initiatives will almost certainly continue to grow.

In an effort to navigate this environment and to help us reconcile current conditions with our long-term objectives we are focused on five prerequisities. Principal among these, of course, is the containment and medical cure of the virus. Beyond that, the integrity of a market advance seems to rest on four critical pieces of information:

A measure of the trough level of activity, i.e., how bad will it get?

A timeline for the full reopening the economy

The shape of the recovery – V, U, W, L, etc. While a V-shape would be the quickest rebound, our modeling shows we are more likely to face a U-shaped recovery.

A growth catalyst

As we navigate through the dislocation and uncertainly caused by the rapid onset of this crisis, we are wise to also focus on the longer-term opportunities it presents. The resiliency of the American economy and, more importantly, its people, will carry the day. The kernels of new industries will be formed in the depths of the pandemic, and we appear resolved to put as much of a premium on social profit and well-being as we are on the financial ramifications. From our darkest days comes a bright future.

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