Federated: No Double-Dip Recession On The Horizon
We continue to think the S&P will reach 3,800 this year and 4,200 in 2021.
BOTTOM LINE After bottoming in April, the U.S. economy has recovered sharply over the past eight months from the deepest recession in history, led by the labor market, housing, autos, manufacturing and consumer spending. Inventory rebuilding has resumed recently, and corporate profits have been much better than expected over the second and third quarters. To that point, we continue to believe the recession likely ended in May or June, although the National Bureau of Economic Research (NBER) has not yet officially dated its conclusion.
But there has been a noticeable softening of some key economic metrics over the last month or so, perhaps due to the recent spike in coronavirus infections and the absence of a Phase 4 fiscal stimulus plan out of Congress. The data points that have taken a near-term hit include business and consumer confidence, employment, auto sales, both the ISM manufacturing and service indexes, and all six of the regional Federal Reserve indexes.
Some bearish prognosticators now believe the economy is poised to experience an air pocket over the next few quarters that will result in a double-dip recession. We disagree and instead think fourth-quarter growth is accelerating due to strengthening trends in manufacturing, Christmas-related retail spending and inventory rebuilding. However, we do envision the first quarter of next year softening sequentially—but remaining positive—due to congressional intransigence on additional stimulus, the surge in Covid-19 infections and the timing of the vaccine rollout.
Stocks rally hard The S&P 500 has surged nearly 15% since the end of October and has now rallied 69% from its March 23 trough to a series of record highs. Investors have largely discounted much of the powerful economic and corporate profit rebound we’ve enjoyed over the past eight months, and we maintain our target price of 3,800 for this year.
As we look across the proverbial valley into 2021, widespread vaccine distribution, a zero-bound Fed, more fiscal stimulus and easy year-over-year comps will help to drive stocks up to our year-end 2021 target of 4,200.
With a total return potential of about 15% over the next year, why aren’t we aggressively adding to stocks right here? We’re also concerned about a series of short-term risks, including the spike in infections, uncertainty on the size and timing of fiscal stimulus, the federal government’s budget deadline of Dec. 11, the year-end Brexit deadline and the two Georgia Senate runoffs on Jan. 5. Resolution of those issues and/or more attractive relative valuations might tempt us to increase our current 4% equity overweight.
Raising our fourth-quarter GDP estimate The equity, fixed-income and liquidity investment professionals who comprise Federated Hermes’ macroeconomic policy committee met last week to discuss the post-election political and economic environment and the progress made in vaccine development:
- The Commerce Department left its third-quarter 2020 GDP growth figure at 33.1% (quarter-on-quarter, annualized). That is the strongest quarterly gain in history, due to the powerful recovery in the labor market, autos, housing, consumer spending and manufacturing since the economy’s trough in April. The second-quarter’s decline of 31.4% was the worst on record.
- With better-than-expected manufacturing and Christmas shopping trends so far this quarter, we also expect the current inventory restocking will accelerate. In addition, we expect the availability of one or more vaccines for limited emergency use by year-end. In light of this, we raised our fourth-quarter 2020 growth estimate from 4.5% to 5.1%. The Blue Chip consensus was unchanged at 3.8% (within a range of 1.5% to 5.7%), but the Atlanta Fed’s GDPNow forecast is currently at 11.2%, up sharply from 3.5% just a month ago.
- We increased our full-year 2020 growth estimate a tick from a decline of 3.8% to a decline of 3.7%. The Blue Chip consensus raised its estimate from a decline of 4% to a decline of 3.7% (within a range of -4.2% to -3.4%).
- Given concerns about the size and timing of a potential Phase 4 fiscal stimulus by Congress, we reduced our first-quarter 2021 GDP growth estimate from 4.6% to 3.4%. The Blue Chip consensus lowered its estimate from 4% to 3.6% (within a range of 1.9% to 5.7%).
- We remain confident that after President-elect Biden’s inauguration on Jan. 20, Democrats in the House will greet him with generous fiscal stimulus and infrastructure spending plans, which will likely boost economic growth in the short term. So we increased our second-quarter 2021 growth estimate from 4.7% to 5.3%. But the Blue Chip consensus lowered its forecast from 4% to 3.6% (within a range of 1.5% to 5.5%).
- As vaccine distribution rolls out aggressively over the first half of calendar 2021, we may approach herd immunity in the second half to the point that personal and business behavior and economic activity begin to normalize. As a result, we increased our third-quarter 2021 growth estimate from 2.9% to 4%, compared with the Blue Chip consensus, which reduced its forecast from 3.7% to 3.4% (within a range of 1.7% to 5.2%).
- We increased our fourth-quarter 2021 estimate from 2.9% to 4%, compared with the Blue Chip consensus, which lowered its estimate from 3.4% to 3.2% (within a range of 1.8% to 5%).
- Our full-year 2021 GDP estimate remains at 4.5%. The Blue Chip consensus tweaked its from 3.9% to 4% (within a range of 2.9% to 5%).