Stocks appear to be pricing in an economic ‘bungee cord snap-back’

Investors on Friday greeted the grim news that April jobs data printed the highest unemployment rate since the Great Depression in an odd way — by sending stocks on a monster rally.

The coronavirus pandemic that’s decimated the U.S. economy — causing the loss of 20.5 million jobs and an unemployment rate of 14.7% — is being softened by a gradual relaxation of the shutdowns designed to prevent the crisis from worsening.

It’s something that David Bailin, Citi (C) Private Bank’s chief investment officer, attributed to investor optimism that a recovery will be underway by fall — even as data showed gross domestic product (GDP) contracted sharply in Q1.

“The market has priced in an unbelievably bad [second quarter], a really sharp decline in GDP, which we think could be 35% or 40%, and is then looking to the third quarter to see a bungee cord snap-back of the economy,” Bailin told Yahoo Finance.

With many workers being characterized by the government as temporarily laid-off, there’s a good chance many will be right back to work within months. Bailin acknowledged that the pace of rehiring might be slower in some industries — such as autos, travel and housing — than others, stretching out the recovery’s timeline.

ASBURY PARK, NJ – MAY 4: A rider drives his motorcycle near the closed boardwalk. Some towns along the Jersey Shore expect the reopening of beaches soon. (Photo by Eduardo MunozAlvarez/VIEWpress/Corbis via Getty Images)

“What we’ve projected is that it’ll take about two years for the economy to reach where it was in the first quarter of 2020,” Bailin said, joining a growing number of economists who think the recovery will take longer than initially thought.

“The question is, does that actually occur? Or is there an impact from something that’s unexpected, for example, a marked worsening of the pandemic or some other economic impact that we don’t anticipate that could derail us?” he asked.

A number of big retailers have filed for bankruptcy, while other sectors are struggling to hold on. Bailin suggested companies that don’t have enough capital to survive will see a tough road ahead, yet other investing choices should become clear.

“There are going to be a handful of companies and industries that are clear winners and beneficiaries,” he said. “You want to continue to own those, but you want to then tilt your portfolio to those companies that are going to take a year or a year and a half to recover.”

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