Why the coronavirus outbreak means a rally in stocks and the economy are highly unlikely

Those strategists on the Street continuing to hold onto a view that a ‘V-shaped’ recovery — where things snap-back hard — in stocks and the U.S. economy is likely later this year as coronavirus runs its course may want to reassess.

Because the fact of the matter is that real lasting damage to the economy is being done at the hands of the coronavirus, irrespective of the Federal Reserve’s new major stimulus plan. Big airline companies such as United Airlines — walloped by plunging travel demand — are now exploring layoffs to protect dwindling cash piles. Cruise line companies from Norwegian Cruise Line, Carnival Cruise Lines and Royal Caribbean could be damaged for years due to the spread of coronavirus on ships.

Debt-saddled oil companies could go out of business amid the one-two punch of increased Saudi Arabia production and slowing demand that has sent oil prices into a tailspin.

Banks will unlikely go on a hiring spree anytime soon in the land of new 0% interest rates from the Federal Reserve, which stands to hammer net interest margins.

Welcome to the new economic norm for the foreseeable future — a recession this spring that lends its way to only a modest recovery in the second half of the year.

“It’s pretty rare from a stock market perspective to get a true V-shaped recovery, we saw that coming off the lows of December 2018. I think there was some hope among investors that Friday was that similar rebound, obviously that is not the case. Usually bottoms are processes over time. I would be inclined to think this one will be more of a process over time,” said Charles Schwab chief investment strategist Liz Ann Sonders on Yahoo Finance’s The First Trade.

Close up of stock market trader looking at graph of share prices

Sonders added, “A V-shaped recovery in the economy is a stretch.”

To that end, Wells Fargo’s economic team said Monday that U.S. GDP will contract 3.3% in the second quarter and by 2.3% in the third quarter. For the full year, U.S. GDP is seen rising a modest 0.5%.

If that mark is hit, U.S. growth would be at the weakest pace since 2009.

“Significant supply chain disruptions and a further tightening of financial conditions will also weigh on the pace of overall economic activity. We look for GDP growth to slowly recover in the second half of the year, as the twin shocks dissipate (COVID-19 and oil prices) and in response to substantial fiscal stimulus,” Wells Fargo researchers write. “The uncertainty around our forecast is much greater than normal. The path of the U.S. economy will largely depend on how the COVID-19 outbreak evolves, which is highly uncertain.” 

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.

Source Article