Economic outlook

Q2 2020: Into the unknown

We present a series of articles to offer guidance to investors, context from prior economic cycles, and details of policy solutions and expected impact.

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April 3, 2020 | 30 minute read

Executive summary

Our economy is facing unprecedented challenges as we navigate the COVID-19 pandemic. The economy most likely entered a recession in March 2020 with the largest economic decline in modern history. Policymakers acted fast, delivering sizable fiscal and monetary stimulus that will help mitigate some of the economic decline. Financial markets also experienced exceptional volatility and dislocation. As the scope of the economic slowdown becomes clearer over the next quarter, valuations could see further volatility and downside, which is typical during the early stage of recessions.

Into the unknown

Writing an outlook at a time of so much uncertainty due to the COVID-19 pandemic is difficult, to say the least. For many economists working with a traditional GDP model, the assumptions going in are as much of a guess – educated though it may be – as the final numbers of the forecast. The economy most likely shrank in Q1, with prospects for Q2 shaping up to be a devastating dislocation in economic activity, employment and output. March 2020 will likely mark the end of our record-long expansion.

Having experienced many economic and credit cycles, I have learned three critical lessons. First, each cycle is unique – in catalysts, vulnerabilities and challenges. After each cycle, we work to remedy vulnerabilities and put a framework in place to address reoccurrence. History can be immensely helpful but is not a blueprint for the future.

The second lesson is that over the long run, our $20 trillion economy remains vast, dynamic and broadly resilient. The benefit of a wider vision shows us that we do recover; we find normal again. It will likely be a different normal. Events like 9/11 or the OPEC oil embargo of the 1970s have a lasting imprint on our culture. But our economy does heal from downturns and eventually comes out strong on the other side.

The third lesson is that while the downturn – both financial and economic – is happening, it can be very scary indeed. Now even more so because the real problem is a health crisis, not a downturn born of economic excesses or financial sector folly. It is hard to wrap our minds around the fact that the dislocation – economic and social – could last for longer than we initially anticipated. Our next normal may well look different from the last decade.

For these reasons, our Q2 outlook will focus less on trying to estimate dollars and cents of lost activity or the percentage impact on GDP. Current estimates of Q2 GDP range from a 15% contraction to a 33% contraction. Either way, it will likely be devastating to the economy and investors. At the March 15 FOMC meeting, the Federal Reserve did not release economic projections, and Fed Chair Powell noted that given how rapidly events are unfolding, a forecast is “just not something that’s knowable” and that “writing down a forecast … didn’t seem to be useful.”

Instead, we present a series of articles to offer guidance to investors, context from prior economic cycles, and details of policy solutions and expected impact.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

Lara Rhame

Chief U.S. Economist + Managing Director

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