Market Insights

The market expects more terrible employment data from ADP today as coronavirus rips through the economy. Now that businesses are reopening, let’s recap the disease’s impact and what to expect next.

How Coronavirus Has Impacted the Economy

Covid-19 has done unprecedented damage to the U.S. economy:

• About 30 million jobs erased, more than all the positions created since the 2008 financial crisis.
• Gross domestic product down 4.8 percent.
• Consumer sentiment fell the most ever, to its lowest level since 2011.
• Industrial numbers have had their its sharpest drops in years, if not ever.

Most recessions have some kind of warning, like unsold merchandise or slowing industrial orders. This crisis was totally different because business was actually improving before the pandemic spread.

Coronavirus didn’t appear in hard economic numbers until mid-March, three weeks after the stock market crashed. (The New York Federal Reserve’s Empire Index on March 16 was the first strong clue.)

This is an important lesson because data often looks backward. It also explains why equities climbed in the face of bearish reports in April. Remember that the stock market is usually forward looking.

What Comes Next

About half the states have already reopened, led by Texas and California. Even areas like New York, which remain under lockdown, see their cases peaking.

While this is clearly good news for the economy, anticipating the market’s reaction may be harder. Some traders may look industries hit the hardest by coronavirus to rebound most quickly: firms like airlines, retailers, banks and energy stocks.

However, that could be a mistake because the crisis will probably linger for them. Take airlines and energy as examples. Even as people start flying and driving again, the economy is in recession and millions of people are out of work. That also means interest rates will stay low — not great for financials.

Instead, investors are sticking with companies least impacted by the crisis. That mostly includes biotechnology, software companies and e-commerce.

Coronavirus and Interest Rates

Low interest rates are a key results of coronavirus — thanks to the recession and cuts by the Fed.

Low rates mean that investors can’t make money in the bank or the economy getting bigger. Instead they must focus on the handful of companies with their own internal growth stories, with means innovative products like software and biotechnology. Not surprisingly, these are some of the best performing industry groups this year.

It may seem counterintuitive, but there is a logic: Once volatility calms down investors start putting money back into the market. However they look to buy the best stocks, with the strongest prospects right now. As a result, they often pay a premium for higher-quality companies.

Gold and gold miners are the other big beneficiaries. Low interest rates drive money out of traditional savings accounts and into places like gold. Precious metals are also a hedge against inflation, which could accelerate as businesses reopen.

When Will Economy Recover?

No one knows how the economy will recover from coronavirus, or whether the disease will have a second wave. But investors do know two important things.

First, jobless claims and regional Fed reports will tell us when the rebound is taking hold. These are reported with the least lag time, and were the first to flag the crisis. They’ll also be the first to show it’s ending.

Second, investors have a sense of what to buy when the recovery takes hold: financials, industrials and small-caps. These companies generally profit from a strong economy. Many are also trading at long-term lows and relatively cheap multiples. That will make them attractive on a relative basis compared with expensive growth stocks.

In conclusion, living Americans have never had to deal with anything like coronavirus. Its massive impact was totally unforeseen just a few months ago. We don’t know how exactly how the market will recover. But some patterns have already emerged to help make decisions going forward.