Morningstar - Q4 2020 - 44

Spotlight: World After COVID-19

100
100

19
19

95
95

18
18

90
90

17
17
2019
2019

Though Hit Hard,
Economy Will Rebound
Without a vaccine in hand yet, the economy has
taken a hard hit in 2020 as lockdowns have
led to an unparalleled disruption. We expect U.S.
GDP will drop about 5% this year, double the rate
of decline in 2009 and the largest contraction
since 1946. Still, for investors, COVID-19's long-term
effect on economic activity is the more relevant
question than what happens in 2020. Considering
that the equity value for a company is the
present value of the discounted free cash flow the
firm can generate over the long term, the value
of a stock is driven more by its long-term outlook
rather than a short-term economic disruption.
We expect the long-term impact on total U.S.
GDP will be minimal. We examined the history of
global recessions for clues on the coronavirus'
impact on economic growth and found that many
recessions don't have a long-term impact on
the economy. The worst recessions, such as the
Great Depression of the 1930s and the Great
Recession of 2007-09, are generally the product
of persistent economic policy error.
Policy response to the COVID-19 recession has
been unprecedented, especially the U.S.'
historically large fiscal stimulus. During the early
stages of the pandemic, the Federal Reserve not
only dusted off its playbook from the global
financial crisis, but it also instituted several new
programs to flood the markets with liquidity
and provide financing to the corporate sector.
Likewise, we think the risks of a financial
crisis are low. Before the pandemic, banks were
well capitalized, and they quickly booked a
significant amount of reserves during the first and
second quarters of 2020 to absorb projected
losses. Underlying structural issues going into
this recession paled compared with the economic
distortions before the Great Recession. By
2024, we think U.S. GDP will recover to just 1%
below our prepandemic expectation.

2021
2021

2022
2022

2023
2023

2024
2024

EXHIBIT

Quick Recovery Morningstar expects robust U.S. GDP growth after 2020 (Panel A),
bringing growth to just 1% below our pre-COVID-19 trend by 2024 (Panel B).
Panel A: U.S. Real GDP Forecast (Growth)

U..SS.. Real
Real GDP
GDP
U

PrePre-COVID
COVID Forecast
Forecast
PROJECTION
PROJECTION

8%
8%
66

5.6
5.6

44
2.5
2.5

2.9
2.9
1.6
1.6

2.4
2.4

2.9
2.9

2.3
2.3

2.1
2.1

2.8
2.8
1.7
1.7

1.6
1.6

2.3
2.3

1.6
1.6

2.3
2.3

1.6
1.6

22
00
-2
-2
-4
-4

-5.1
-5.1

-6
-6
-8
-8
2014
2014

2016
2016

2018
2018

2020
2020

2022
2022

2024
2024

Panel B: U.S. Real GDP Forecast (Levels)

Ratio
vs. PrePre-COVID
COVID
Ratio vs.
110%
110%

Pre-COVID
PreCOVID
PROJECTION
PROJECTION

U.S.
Real GDP
GDP
U.S. Real
$21T
$21T
20.8
20.8
20.6
20.6

105
105

20
20

100
100

19
19

95
95

18
18

90
90

17
17
2019
2019

Source: Morningstar.

44

2020
2020

2020
2020

2021
2021

2022
2022

2023
2023

2024
2024
Morningstar - Q4 2020

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