The rally that started in late March has been surprisingly strong. Many equity exchanges have technically entered a new bull market, having rallied +20% or more off their intra-month March lows. (If anything, it possibly suggests that using labels such as bull or bear markets matter less than most people think if you can enter both within a five-week period!) The recovery in markets has most likely been driven by robust central bank support and a belief in a very rapid economic rebound – the so-called V-shaped recovery.
We maintain our view that the global economic recovery will at best start in the fourth calendar quarter of 2020 and will slowly gain traction in 2021 – in other words, a U-shaped recovery. The reason behind our more conservative stance is driven by the surge in unemployment globally.
Economies shed labour much faster than it can be re-employed. When the recovery starts, employers are unlikely to initially staff up to pre-recession levels until a clearer picture of the sustainable demand emerges. Even then, there are the day-to-day frictions of the employment market (employees may have found jobs in other industries, businesses may have closed, people or businesses have relocated, etc.) that will cause a lag to re-employment. The scale of job losses around the world over the last eight weeks has been staggering, and we do not think it will simply bounce back. As such, we believe that labour markets will take a long time to return to 2019 levels, meaning aggregate demand will also take some time to recover.