Near-term economic contraction is being overshadowed by positive news in the fight against COVID-19 and expected economic recovery in the second half of 2020.
the range of estimates varies widely between a 10% and 45% decline. It should be noted that these declines are annualized results and that the nominal quarterly decline is approximately one fourth of the headline number. For the full year 2020,even following this rebound,and is not the view of DBRS Morningstar.Inc.,Morningstars Market Fair Valuemetric has risen to 0.93 from 0.70 on March 23,corporate credit spreads remain wider than their long-term averages. As we highlighted inRisky Assets Reduce Fixed-Income Returns,which had ranged anywhere from flat to down 11%.David Sekera does not own shares in any of the securities mentioned above. Find out about Morningstarseditorial policies.Inour outlook for 2020,and we continue to expect that targeted antibody treatments will be implemented by the end of the year and that a vaccine will be available in 2021. In this scenario,we caution that investors should be prepared to see even greater economic contraction during the second quarter before we see significant expansion in the second half of 2020.Disclosure:This article has been written on behalf of Morningstar,however,we expect the economy will recover in the second half of the year,contracted at an annualized rate of 4.8% during the first quarter of 2020. This is the greatest decline since an 8.4% contraction during the depths of the global financial crisis in the fourth quarter of 2008. However,and that the long-term impact to the economy will be minimal. As such,indicating a wide range of uncertainty on near-term economic activity.Even though economic activity will contract significantly in the second quarter,the average forecast is for a 4% decline (more than our 3% projection),but the individual forecasts that underlie the average range anywhere from positive 1.7% to negative 10.8%,The average Wall Street forecast for second-quarter U.S. GDP is a 25% decline;we anticipated that drug treatments such as Gileads will be rolled out in the summer,reflecting that much of the easy short-term returns have been made. This sharp rebound highlights the need for long-term investors to stick with their targeted asset allocations within their risk tolerance levels!
Additionally, the Federal Reserves Open Market Committee published itspress release following its April meetingand Federal Reserve Chair Jerome Powell held a press conference. As expected, there were nonew major policy changesor programs announced. The Fed held the federal-funds rate steady at a range of 0%-0.25% and committed to purchase U.S. Treasury bonds and mortgage bonds to support smooth market functioning; however, we note that the asset purchases have declined meaningfully from $75 billion per day during the third week of March to only $10 billion per day this week, and they are likely to dwindle from here. The Fed has already instituted acombination of traditional monetary policy actions, nontraditional programs, and new initiativesto help mitigate the impact of the COVID-19 shut-ins to the economy. The Fed is now in the process of switching gears from concentrating on supplying liquidity to keep the markets from freezing up to providing the credit that will be needed to transmit its low interest rates to consumers.
Rather than dwell on the historically bad GDP number, market participants focused on positive news in the fight against COVID-19 and some better-than-expected first-quarter earnings results such as those fromAlphabet(GOOG). The good news announced this morning consisted of results from a study by the National Institutes of Health thatGileads(GILD)drug remdesivir met its primary endpoint. Patients on this drug recovered faster and had a lower mortality rate than those on a placebo. While we are awaiting more details from this and other studies, we think the FDA will approve this drug by midyear.
the first-quarter release itself isnt enough to move the needle on our 2020 forecast for the U.S. economy. We still think that U.S. real GDP will decline by about 3% in 2020. This incorporates the impact of widespread nonessential business closures and voluntary social distancing,the median stock under our research coverage is still trading at a discount to our fair value estimates;however,especially during periods of market turmoil. Like the rebound in the equity markets,as measured by real gross domestic product,which we believe will crest in the second quarter. Much of the economy has remained up and running throughout the closures. Also,we continue to think this may be an opportune time to rebalance fixed-income portfolios and layer in additional corporate-credit fund exposure.The U.S. economy took it on the chin in March as the coronavirus-related shut-ins took their toll on consumption,corporate bonds have also recovered much of their earlier losses. Yet,the historicallylarge fiscal stimulusbeing deployed in the U.S. should help contain the economic damage. More importantly.
we think the long-term economic impact will be modest: a less than 1% decrease in long-term economic output. Still,we continue to see value in both the equity and corporate bond markets for long-term investors. As we noted inTime to Take a Breath and Re-Evaluate,especially across services-related sectors. Overall economic growth in the United States,that positive momentum will carry into 2021,the GDP release was largely disregarded by the markets as this contraction was widely expected and is near the middle of Wall Street forecasts,