What a re-opening might look like

by: , Chief Investment Officer and Managing Director | IndexIQ; IndexIQ,

It was Supreme Court Justice Louis Brandeis who called the states the “laboratories of democracy,” but it’s unlikely he meant that literally. As the country starts to consider what an economic re-opening might look like, there have been some substantial policy divergences across regions. Georgia, for example, has started to reopen. New York and California, two epicenters of the disease, effectively remain on lockdown. In terms of both the potential positives and the negatives, these differing approaches will soon provide a window into what a re-opening might look like for the broader U.S. economy.

Being in the midst of a crisis is like standing at the bottom of deep canyon: The sky is up there, but it’s hard to know how you’re going to climb out. But we know from past experience that every crisis eventually ends, and this one will, too. Economists, epidemiologists, academics, market prognosticators and most everyone else are all weighing in on what will happen next. Just as many early predictions about the coronavirus turned out to be inaccurate, forecasters are likely to miss some things here as well. We have never seen the economy shut down as abruptly as this, so we have never experienced a restart.

Recovery forecasts range from a year or more to something quicker and sharper. Realistically, getting back to anything approaching what economic activity, and even daily life, was like before is likely to take time. Many of the jobs that were initially lost were in service industries, like restaurants and travel; their recovery will depend on how quickly people begin to dine out, travel, and interact socially again. Other industries have suffered as the effects of the shutdown cascaded through the economy.  Some, like mall-based retail for example, may see the decline that they were already experiencing accelerate by orders of magnitude.

One positive: unlike most downturns, the economy was in generally good shape going into this, so that should provide some support for a return to normalcy.

Markets, for their part, tend to be forward-looking. The recent recovery from the lows suggests that investors are starting to look beyond the current data, which has been almost uniformly awful. But as the economy advances in fits and starts, volatility is likely to persist. Earnings season is off to a rough start, and the unemployment numbers have been grim. Forward-looking data has been mostly negative, too. Pushing back against this tide of terrible economic news has been government spending, which at the latest check was around $3 trillion, or more than 10% of annual U.S. GDP, and the Federal Reserve, which has pledged to provide liquidity to the markets.

This is all new territory, and that makes forecasts of everything from oil prices to consumer spending more uncertain than ever. One thing we can forecast: there will be surprises, on both the upside and the down. There’s been major economic damage, but there’s also huge pent-up interest in getting going again. The phased lifting of restrictions will probably serve to attenuate the impact of that enthusiasm, but it’s the direction and not so much the pace that is likely to capture the attention of investors.

And there’s always the possibility of a positive exogenous event (hard is it may be to believe after what we’ve been living through the past few months, they do happen): progress on developing a treatment for the disease, or even meaningful steps forward in developing a vaccine. That’s an outcome we can all get behind.

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This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

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“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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IndexIQ, a New York Life Investments Company, is a trusted provider of innovative financial solutions. IndexIQ ETFs are built and delivered in a way that provides exposures that investors can rely on. A subsidiary of one of the oldest and largest life insurance companies in the world, we have a solid foundation and the resources to continue our culture of innovation…

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