How the shutdown might affect the US economy and markets. (Answers to FAQs – Part 4)

Our market strategists weigh in on what drove a recent market rally, how the shutdown will affect the economy and markets, and what additional government support may be coming.

Q. How does the recent market rally compare with past short-term market rallies? How have markets historically fared following sharp moves to the upside?

The 25% rally in the S&P 500 Index from the market bottom on March 23, 2020 through April 9, 2020, stands as the best 13-day period in the history of the index.1 The move surpassed the 13-day rallies that began on March 9, 2009; July 23, 2002; August 12, 1982; and October 4, 1974.2 Notably, each of the other top-5 best 13-day rallies on record began near the end of recession bear markets. In two of the instances, markets did fall toward (in 1974) or through (in 2002) the prior bottom.3 Today, we expect markets to be volatile in the near-term and to potentially retrace lower levels. In each of those past 13-day rallies, stocks were meaningfully higher one year later (March 2009-2010, +72%; July 2002-2003, +26%; August 1982-1983, +66%; and October 1974-1975, +44).4

Q. What’s been leading this recent rally? How do we square higher stock prices with weak economic data?

The S&P 500 Index rally has been driven by: 1) a massive policy response; 2) modestly better hospitalization and new cases numbers in many of the hardest-hit areas of the country; 3) hope for potential treatments; and 4) the reality that many of the large market-capitalization companies are reasonably well positioned for the current environment. Many of the mega-cap companies that led the rally are the same handful of companies that produced roughly 20% of the earnings of the S&P 500 Index in the fourth quarter of 2019.5 Nonetheless, the S&P 500 Index, even with the top 10 holdings excluded, returned 19% over the 17 trading days ended April 17, 2020.6

Q. What’s the near-term cost of the shutdown, and how did it likely impact US Gross Domestic Product (GDP) in the first quarter of 2020?

The size of the US economy is about $20 trillion,7 which equates to roughly $370 billion per week ($20 trillion/52). If half the economy was shut down for four weeks, that would imply a 10%-15% quarter-over-quarter drop in 1Q20 GDP, at an annualized rate. Eight weeks would imply a 25%-30% drop. Clearly, the shutdown becomes more costly with each passing week. Congress’s $2 trillion-plus package is roughly 10% of US GDP, providing a cushion for the first weeks of the shutdown. More stimulus is likely in the offing.

Q. How does the coming decline in corporate earning compare with other recessions? How quickly does the market normally price it in? Will this be worse than a 15% decline?

At the end of 2019, US earnings hit a record high of $157, up 3.6% compared with 2018.8 In recent months, however, the coronavirus-related shutdown has delivered significant shocks to the economy at a vulnerable stage of the business cycle. We judge that the stock market has priced in a 15% drop in earnings to roughly $134. That’s bad, but it could get much worse. By way of example, earnings during the 2008-2009 and 2001 recessions declined by as much as 30%-40%, a comparison that suggests markets have not yet priced in the full extent of the current earnings collapse.

Q. Why are US oil prices plunging?

Oil prices globally had collapsed as a result of drastic decline in global demand for commodities, and the situation was aggravated by large global oil producers, such as Saudi Arabia, maintaining production to support cash flows. The OPEC+ countries have recently committed to cutting supply, but not by enough to offset the decline in demand. West Texas Intermediate (WTI) crude oil prices are now plunging and the gap between Brent crude and WTI has widened meaningfully, as the US stock of crude oil, gasoline, and jet fuel have risen to record levels.9 While the first response for the US oil producers was to pump oil and maintain cash flows, the number of rig counts (a measure of active drilling rigs) is now starting to fall,10 a development that should help to produce a floor for oil prices.

Q. What is the outlook for additional fiscal support being provided to the economy?

The White House and Congress appear poised to reach a deal to extend the Paycheck Protection Program. The plan will likely include a near doubling of the size of the small-business loan program ($300 billion), as well as providing additional funding for hospitals ($75 billion), disaster loans ($25 billion), and the federal coronavirus testing program ($25 billion). The fiscal spending, combined with the monetary stimulus, amounts to over 20% of US GDP.11

Q. Are you worried about the deficit spending? Is this going to be massively inflationary?

The U.S. fiscal package is already equal to roughly 10% of US GDP, and it is designed to provide support to small businesses, households, and the health care system during the elongated shutdown of large segments of the US economy. The US deficit will expand meaningfully in the next few years to provide a cushion for the US economy and to provide support for an economic recovery. The government is currently borrowing money at very low rates, as there is strong demand for US dollar assets. Near-term fears of inflation are misguided, in our view, given the extent of the ongoing demand destruction and the persistent risk of deflation. The market’s current forward five-year expectation for inflation is 1.5%12 below the US Federal Reserve’s perceived comfort zone, and that is indicative of a bond market that is still gripped by fears of deflation.

Q. What is our outlook from here?

We put together a series of market bottom indicators that we released here. These indicators give us a detailed look at what we would need to see before we become more confident that a new cycle is beginning. We’re not there yet. While many of the indicators are starting to improve, inflation expectations remain weak, the US dollar remains strong, and commodity prices are plummeting. As a result, short of a medical breakthrough, there does not appear to be a catalyst for markets to continue this advance. We would expect volatility to persist and markets to potentially retrace lower levels. That being said, we are still not suggesting investors should avoid, or reduce their positions in, equity markets for the long term. Ultimately, we believe that betting against equities over the long term is akin to betting against policy, science, and human ingenuity.


  1. Source; Bloomberg, Standard & Poor’s, as of 4/17/20
  2. Source: Bloomberg, 4/17/20. As represented by the S&P 500 Index
  3. Source: Bloomberg, 4/17/20. As represented by the S&P 500 Index
  4. Source: Bloomberg, 4/17/20. As represented by the S&P 500 Index
  5. Source: FactSet Research Systems, 12/31/19
  6. Source: FactSet Research Systems, 4/17/20
  7. Source: Bureau of Economic Analysis, as of 4/17/20
  8. Source: Standard & Poor’s, as of 4/17/20
  9. Source: Bloomberg, as of 4/17/20
  10. Source: Baker Hughes, as of 4/17/20
  11. Source: US Bureau of Economic Analysis, US Federal Reserve
  12. Source: Bloomberg, as of 4/20/20

Important Information

Blog header image: Jeff Wasserman / Stocksy

The S&P 500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period.

OPEC+ includes the 13 members of the Organization of Petroleum Exporting Countries, as well as 10 additional non-member countries.

West Texas Intermediate (WTI) and Brent are light, sweet crude oils that both serve as benchmarks for oil pricing.

The Paycheck Protection Program is a US Small Business Administration loan program to help businesses keep their workforce employed during the COVID-19 crisis.

In general, stock values fluctuate, sometimes widely, in response to activities specific to each company as well as general market, economic and political conditions.

The opinions referenced above are those of the authors as of April 21, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial advisor/financial consultant before making any investment decisions. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Brian Levitt is the Global Market Strategist, focusing on North America, for Invesco. He is responsible for the development and communication of the firm’s investment outlooks and insights.

Mr. Levitt has two decades of investment experience in the asset management industry. In April 2000, he joined OppenheimerFunds, starting in fixed income product management and then transitioning into the macro and investment strategy group in 2005. Mr. Levitt co-hosted the OppenheimerFunds World Financial Podcast, which explored global long-term investing trends. He joined Invesco when the firm combined with Oppenheimer Funds in 2019.

Mr. Levitt earned a BA degree in economics from the University of Michigan and an MBA with honors in finance and international business from Fordham University. He is frequently quoted in the press, including Barron’s, Financial Times and The Wall Street Journal. He appears regularly on CNBC, Bloomberg and PBS’s Nightly Business Report.

Talley Léger is an Investment Strategist for the Global Thought Leadership team. In this role, he is responsible for formulating and communicating macro and investment insights, with a focus on equities. Mr. Léger is involved with macro research, cross-market strategy, and equity strategy.

Mr. Léger joined Invesco when the firm combined with OppenheimerFunds in 2019. At OppenheimerFunds, he was an equity strategist. Prior to Oppenheimer Funds, he was the founder of Macro Vision Research and held strategist roles at Barclays Capital, ISI, Merrill Lynch, RBC Capital Markets, and Brown Brothers Harriman. Mr. Léger has been in the industry since 2001.

He is the co-author of the revised second edition of the book, From Bear to Bull with ETFs. Mr. Léger has been a guest columnist for The Big Picture and for “Data Watch” on Bloomberg Brief, as well as a contributing author on Seeking Alpha ( He has been quoted in The Associated Press, Barron’s, Bloomberg, Business Week, Dow Jones Newswires, The Financial Times, MarketWatch, Morningstar magazine, The New York Times, and The Wall Street Journal. Mr. Léger has appeared on Bloomberg TV, Canada’s BNN Bloomberg, CNBC, Reuters TV, The Street, and Yahoo! Finance, and has spoken on Bloomberg Radio.

Mr. Léger earned an MS degree in financial economics and a Bachelor of Music from Boston University. He is a member of the Global Interdependence Center (GIC) and holds the Series 7 registration.

Timothy Horsburgh is an Investment Strategist at Invesco. In this role, he develops and communicates economic outlooks and investment insights. Additionally, he researches and creates thought leadership pieces to help articulate the firm’s thematic viewpoints.

Mr. Horsburgh joined Invesco when the firm combined with OppenheimerFunds in 2019. He began his career with OppenheimerFunds in 2010 and worked with the investment strategy team. Previously, he worked in roles in the US and Asia. He has been quoted in the press, including in the Financial Times and USA Today. He has also appeared on CNBC and Bloomberg and spoken on Bloomberg Radio.

Mr. Horsburgh earned a BA degree in both economics and government from Cornell University in Ithaca, New York. He is a Chartered Financial Analyst® (CFA) charterholder and holds the Series 7 and 63 registrations.

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