Veteran bull Ed Yardeni tells us why the US economy won't recover before the second half of 2022
- Long-time bull Ed Yardeni doesn't think the US economy will recover to pre-pandemic levels before the second half of 2022.
- He thinks US GDP adjusted for inflation will rise by 15% in Q3 2020, but only by 5% in Q4.
- He told Business Insider: "I don't really see the economy returning back to its level at the end of 2019 until maybe the second half of 2022."
- While he thinks the S&P 500 could hit 3,500 by year-end, he believes a 15-20% correction lower could happen if stocks continue to rattle higher.
- Yardeni is less bullish, having predicted a V-shaped recovery and a "melt-up" in stocks as recently as last month.
Long-time bull Ed Yardeni, who predicted a V-shaped recovery for the US economy as recently as last month, has a very different message now. The world's largest economy won't see growth return to its pre-pandemic levels until the second half of 2022.
The renowned strategist and president of Yardeni Research told Business Insider: "We're expecting that real GDP in the third quarter will be up something like 15% and then maybe 5% in the fourth quarter."
Yardeni, who is credited with coining the phrase "bond vigilantes" back in the 1980's, said he didn't see the economy returning back to where it was in late 2019 until "maybe the second half of 2022." He added: "It's going to be a long, long haul to get back to normal."
"Initially, it may very well be V-shaped, but there are clearly signs in the high-frequency indicators of the economy that the recovery is slowing. So I'm not sure it is a V, U, W, or any other letter of the alphabet. It's more likely a widely heralded Nike swoosh," he added, referring to the sportswear company's iconic "J-shaped" logo.
This marks a change in stance, as Yardeni was looking for a V-shaped recovery — one in which economic growth falls rapidly, before reaching an abrupt trough and recovering just as sharply thereafter. But he has since revised this to a check-mark-shaped recovery, one in which growth contracts rapidly to hit a trough, but then gradually recovers at a far more moderate pace.
US GDP contracted by a record-breaking 33% year-on-year in the second quarter, suggesting that a V-shaped recovery might well be impossible.
After a stomach-lurching drop in March, when the economic impact of the coronavirus became apparent, US blue-chip stocks have since recovered.
A combination of better economic data and more investor confidence in the resilience of the corporate world have since seen Wall Street return, not just to its pre-pandemic levels, but even to record highs, as the Nasdaq has done.
"If the market consolidates here, then I'm not going to be too worried about a correction," Yardeni said. "If the market can continue to move higher and makes new record highs, which it very easily could, I'd be inclined to take some profits and anticipate a correction of 15 to 20%," he added.
Yardeni already foresaw the swift rebound in the stock market, warning last month of a "melt-up" in stocks.
He said at the time: "I think the bull market is still intact. I don't view the sell-off we had in February and March as a bear market."
The S&P 500 fell by more than 12% in March, its biggest one-month drop since the depths of the financial crisis of 2008, when investment bank Lehman Brothers declared bankruptcy. Since then, it has risen by more than 50%, led predominantly by tech stocks.
Yardeni says if stocks move up further, which they very well could, he would start to look for a correction of around 15-20% in stocks. The "Cold War" between China and the US is only one factor that might contribute to a steeper correction.
Tensions have flared up yet again between China and the US in recent weeks. The most recent diplomatic row flared up when the US government closed the Chinese consulate in Houston and China subsequently ordered the closure of the US consulate in Chengdu late last month.
Yardeni expects the S&P 500 to hit 3,500 by year-end, up from around 3,350 right now and well above the existing record at 3,393.5. A 15-20% correction from the 3,500 level would bring the index back to where it was in May.