Goldilocks reopening of the US economy



Quarterly Core Bond Strategy Outlook

In this quarter’s market update, Eaton Vance’s Core Bond team points to expected increases in volatility throughout 2020 as short-term sentiment swings on new developments. Both monetary and fiscal policy will provide a level of support to fixed-income markets, but will also cause distortions, leading to both opportunities and the possibility for value traps.
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By Edward J. Perkin, CFAChief Equity Investment Officer, Eaton Vance Management

Boston - The Goldilocks metaphor has been bandied about since the 1990s with respect to monetary policy set by the US Federal Reserve, but now it has a different context.

When applied to how and when we take the US out of lockdown, the thinking is that we can't be too hard or too soft, too hot or too cold — that we can't move too fast or too slow. Getting the protocols and timing just right will be difficult as the issue becomes increasingly political and emotional — evidenced by the conflicting reactions on social media to the reopening of one discount retail chain.

Since states across the US started to issue stay-at-home orders and advisories in early spring, more and more data releases — especially the report of April's dramatic surge in unemployment — have confirmed what we already suspected about the high economic cost of mitigating the spread of COVID-19. While the evidence suggests that many of the country's hot spots have been able to "flatten the curve" and avoid the disaster of stressing local healthcare systems beyond capacity, we're hardly out of the woods.

Testifying by video before the US Senate last Tuesday, Dr. Anthony Fauci reiterated that we don't have the coronavirus "completely under control." To the disappointment of parents and children everywhere, he warned that schools may not reopen in the fall should we find ourselves confronting a second wave of coronavirus infections.

A Bloomberg reporter recently asked me what signs I was looking for to be bullish.... increased ridership on subways, perhaps? I answered no, I think that would be bearish.... too quick.

Bottom line: Investors seem to be split on whether a quick reopening would be bullish or bearish for the markets and the economy, since we risk falling into a deep recession or going back into lockdown if we don't get it just right.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.