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The Great Separation: Why Consumers Hold a Key to Recovery

April 29, 2020
How the journey from shutdown to recovery is shaping up

Iconic Iceland icebergs lined on a black sand beach

CONSUMERS DRIVE THE U.S. ECONOMY. That basic fact has never been clearer. “They represent 70% of U.S. gross domestic product (GDP) and a large share of global GDP,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. And though consumers have been and continue to be deeply affected by the coronavirus crisis, their inherent resilience is essential to an economic recovery that could begin by the fourth quarter of 2020, according to “The Great Separation,” a new report from the Chief Investment Office.

The recovery is likely to be “U-shaped”—meaning it may kick in only after several more months of low growth and economic uncertainty. And everything hinges on signs that the health crisis is truly turning in a positive direction. Yet thanks to rapid and massive U.S. financial and fiscal stimulus (totaling $7.5 trillion so far, or nearly half of the global total of $15.86 trillion), the economy and consumers have a firm basis on which to rebuild their confidence, Hyzy believes.

“Signs of stabilization have emerged. Credit card spending has recently shown resilience, and consumers were generally in a healthy place prior to the crisis.”

Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank

Getting to recovery

Any talk of renewed confidence must start with sobering numbers. As the virus swept throughout the United States and businesses shut down, weekly jobless claims surged to 6.9 million for the week ending March 28, ten times the high during the global financial crisis of 2008 and 2009, Hyzy says. With millions of Americans staying home, spending on hotels dropped 68% from February to March, clothing by nearly 40% and restaurants by nearly 34%.

“But signs of stabilization have emerged,” Hyzy says. “Credit card spending has recently shown resilience, and consumers were generally in a healthy place prior to the crisis,” he notes. U.S. savings measured 8.2% in February, compared with an average of 4.6% in the years prior to the global financial crisis. “Higher savings could be cushioning some consumers through this recession,” he says. The recovery process, he adds, may run from the fourth quarter of 2020 through the first quarter of 2021.

Unleashing pent-up demand

That cushion may help propel a wave of consumer spending as virus fears ease, stay-at-home guidelines are lifted and Americans en masse seek to recapture a semblance of normal life. Hyzy believes this “pent-up demand” phase could start in earnest in the second quarter of 2021 and continue for the rest of that year. “For Millennials, pent-up demand could mean buying homes for the first time as they look to start families and their spending power rises,” Hyzy says. For consumers of all ages, it could mean moving ahead with delayed purchases of furniture, clothes and cars. Hyzy points to China, where auto sales jumped by 366% in March as its economy began to reopen.

What can investors consider?

Investors, like consumers, may experience their own pent-up demand once the recovery takes hold. Amid the recent volatility, investors have fled to cash, with money market holdings currently valued at $4.5 trillion. “That’s higher than the entire market capitalization of the Eurozone,” Hyzy says.

Many investors are likely to return to stocks when volatility subsides, he adds. Large U.S. companies may be attractive, along with e-commerce and e-sports. Technology and healthcare are other promising sectors. At the same time, Hyzy emphasizes the importance of investing in a diversified portfolio based first on your long-term goals.

For latest insights on the forces likely to drive economic recovery, tune in to the Private Bank CIO Audiocast.

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