Commonly referred to as the Fed Beige Book, the United States Federal Reserve Board publishes a report, Summary of Commentary on Current Economic Conditions, eight times per year. Each report is a gathering of anecdotal information on current regional economic conditions by the twelve U.S. Federal Reserve Banks. In its most recent report, the Federal Reserve said, “Economic activity contracted sharply and abruptly across all regions in the United States as a result of the COVID-19 pandemic”.
As to be expected, weaker economic data continues to be reported. For example, the labor markets have been hit especially hard with Coronavirus job losses already surpassing the Great Recession (see chart). Additionally, first-quarter corporate earnings are beginning to come in and expected to be down, with sharper declines projected for the second quarter. GDP is also forecasted to contract in the first and second quarters.
However, financial markets operate as “discounting” mechanisms. When an unexpected development occurs, such as the global health crisis, market participants quickly discount, or factor in, the information and begin to assign outcome probabilities and financial impacts of future events. This is the reason why financial markets appear to be out of step with adverse, incoming economic data. In other words, the economic data is expected to be bad and financial markets have already considered much of this information.
Looking forward, the financial markets are anticipated to respond more to new coronavirus information, re-opening of the economy, and what an economic rebound could look like. As the economy slowly begins to re-open for business, the financial markets are starting to forecast significantly stronger economic activity for the second half of the year with more normal, positive growth rates for 2021.
Elevated short-term volatility is likely to continue because the range of possible resolutions and outcomes is still very wide. At some point, investors’ focus will shift from the daily scorecard on COVID-19 to determining fair value for individual stocks based on the outlook for profits in a post-healthcare-crisis world. As the attention returns to operating fundamentals stocks will find their levels. It is not a point in time but rather a process that is already underway and ongoing.