Here is a guide to the five indicators that the period of AD (After Disease) is abating, and the era of AB (America is Back) is emerging.
1. Flattened CurveThe first, and in fact, a prerequisite event that will indicate that the economy will come out of this tunnel is the turning of the number of new cases of infection from positive to flat or negative.
In the Wuhan Province, with the strictest lockdown measures ever enforced, it took two months for the trajectory of new cases to level off. Furthermore, there was a span of three months from the first cases in December until March 19 when it was reported* that there were no new local infections.
If we consider the China trajectory to be the best-case scenario (Noting questionable data) and apply those timelines to the U.S., then we should see the path in new cases flatten by mid to late April for states that first issued stay-at-home orders. These states should have fewer new cases by mid-May.
I think this seemingly ambitious timeline is possible because we are growing our testing capacity, and the two most populous states issue stay-at-home orders in March, and others have since followed.
It is from this data that I have based my virus turnaround thesis, which is that by May 18 or sooner, we will see a flattening of the new infection curve, and by September 1, we will be at a much higher capacity to fight this virus.
2. End of Stay-at-Home OrdersThe second and also prerequisite indicator that the economy will be getting back on track is the lifting of stay-at-home orders.
Remember that the economic data from January to February was robust. Job growth in those two months was running at a combined average of 244,500 per month, well above my own 2020 forecast range. Retail sales were growing year over year, and even a few of the regional manufacturing data lines were trending positive.
As I have mentioned previously, housing data was on fire with cycle highs in purchase applications, new home sales and existing home sales. Even housing starts showed almost 40% growth year over year in the last report. In the days of BC (Before Coronavirus), the economy wasn’t going into recession in 2020.
However, the stay-at-home orders that most of the country is now following have basically shut off the economy. Turning that massive machine back on once the protocols are removed will take time, so be patient. We have sustained a lot of economic damage in a matter of weeks. Catastrophic loss can be nearly instantaneous, while rebuilding is a slow and steady process.
3. 10-Year Yield Goes Above 1%Dramatic changes in the bond markets were the harbingers of our oncoming economic decline and will be the beacons for our recovery.
In many ways, we are experiencing an artificially induced recession, so we were unable to rely on the usual early indications to predict the economic crash. In 2006, we had many data lines that were warning us about the economy. The effect of this virus and lockdown protocols on our economy is nothing short of an act of war hitting the country quickly.
On January 20, the first positive test for the coronavirus was reported in the U.S. A month later, the 10-year yield was 1.56%. In all my yearly prediction articles since the end of 2014, I always talked about how the 10-year yield should be in the range between 1.6% -3%.
The bond markets correctly and with great speed reflected the oncoming crash of the economy.
On March 9, we got as low as 0.32% on the 10-year yield, but on March 12, 22 days after 1.56% print on the 10-year yield, the jobless claims were still positive, near all-time lows.
But we all knew what was coming on that day, massive layoffs, as it was also the first day the U.S. government banned gatherings of more than 50 people.
Before the 10-year yield broke under 1%, published my forecast for where I believe recession yields would be: in the range of -0.21% to 0.62% on the 10-year yield. That following Monday, on March 9, bond yields dropped to as low as 0.32%.
We had a massive sell-off in bonds, not because the economy was getting better but because some traders took profits, and others had to liquidate assets, which forced yields back to 1.25%.
The fact that the 10-year yield is at 0.73% while I am writing this tells me that the markets believe that Q3 and Q4 will be better than Q2, which is using the lowest bar in recent history to work from.
An early indicator of recovery would see the 10-year yield above 1% –– especially if it got above 1.33%. A range between 1.33% and 1.6% on the 10-year yield is something we should be rooting for, especially if this happens without liquidation selling of bonds.
Once you get to these levels, know that it’s a good thing.
4. Decline in Credit Stress and Jobless ClaimsWhen credit stress and jobless claims start to fall, you can believe we are on the road to recovery.
Before COVID-19, jobless claims and the Financial Stress Indices were basically at all-time lows.
In this recession, however, the monthly data is too slow to capture the day to day shifts in the economy. A good example is that the recent jobs number showed a loss of 701,000 jobs where the next report could show a report of over 15,000,000 jobs being lost.
5. Data from the hardest-hit sectors starts to trend upwardSome of the hardest-hit business sectors will show recovery first because the declines have been so horrific.
The restaurant industry, airlines, hotels, movie tickets, rideshares and gasoline purchases are some areas to watch. As more people walk the earth, go to work and get back to normal, these beaten-down industries will be some of the first to pick up.
For housing, purchase applications –– which showed double-digit year-over-year growth all the way to March 18 –– had back-to-back negative, year-over-year prints of 11% and 24% for the last two weeks. We are likely to see much deeper year-over-year declines in the coming weeks as more states follow stay-at-home protocols.
You will see a reversal of these negative year-over-year trends as one of the first indicators for housing.
Fiscal and monetary government disaster relief will speed this along. Unlike the Great Depression of the 1920s, we have many more social safety nets, not to mention the government disaster relief of $6 trillion, to help speed the recovery.
Don’t be surprised if the government disaster aid goes above $10 trillion, with more money for people, states and small businesses when it’s all said and done.