The Morningstar US Market Index has come thundering back since its late March nadir and is now down merely 7 per cent year to date, even as the coronavirus pandemic persists.

While many investors are wondering if the market is exhibiting irrational exuberance, we think the rebound has been broadly warranted, as we forecast a strong long-run recovery in the US economy.

We expect US GDP to drop 5.1 per cent in 2020 but surge back in 2021 and experience further catch-up growth in following years (Exhibit 1a).

By 2024, we think US GDP will recover to just 1 per cent below our expectations before the pandemic.

Morningstar forecast a strong long-run US economic recovery

1a US GDP will fall sharply in 2020, but we expect rapid catch-up afterward

U.S. GDP will fall sharply in 2020, but we expect rapid catch-up afterward

Though we agree with consensus forecasts that second-quarter US GDP will be brutal, we're expecting a much quicker recovery. Even while social distancing weighs heavily on some industries, we think the rest of the economy can recover substantially in the second half of 2020 (Exhibit 1b).

1b GDP can bounce back substantially, even while some industries lag

 

GDP can bounce back substantially, even while some industries lag

Retail sales, employment, and other data show that this recovery has already begun for the US. We expect broad availability of a vaccine to erase the coronavirus' direct impact on the US and global economies by mid-2021.

The most important question for investors is what the long-run impact of the pandemic will be on the economy. Our analysis shows the typical stock valuation is drastically more sensitive to the long-run impact on GDP than the short-run impact (Exhibit 1c).

1c Long-run GDP impact is the most important question for investors

 

Long-run GDP impact is the most important question for investors

We've examined the history of global recessions for clues on the coronavirus recession's impact on long-run economic growth and found that many recessions don't have a long-run impact on the economy. The worst recessions in terms of long-run impact (the Great Depression or the Global Financial Crisis) are generally the product of persistent economic policy error.

We've distilled what we learned on what causes recessions to go wrong into a long-run impact scorecard (Exhibit 1d), where we rate the coronavirus' recession.

1d Earlier recessions suggest only a mild long-run hit from the coronavirus

 

Earlier recessions suggest only a mild long-run hit from the coronavirus

Most important, policy response has been extremely impressive, especially the US's historically large fiscal stimulus. Likewise, we think risks of a financial crisis are small currently, as central bankers are unconstrained by the moral hazard quandary.

Underlying structural issues going into this recession pale compared with the economic distortions before the GFC. We forecast a long-run impact on US and global GDP of just negative 1 per cent.