/In One Chart: We’re dealing with ‘a shock of unknown — and unknowable — length and depth,’ economist warns

In One Chart: We’re dealing with ‘a shock of unknown — and unknowable — length and depth,’ economist warns

One look at Wednesday’s nasty action in the stock market — the Dow Jones Industrial Average

DJIA, -5.86%

closed down more than 1,400 points — and you might take issue with Ian Shepherdson’s stance that we’re just seeing “the calm before the storm.”

But the chief economist at Pantheon Macroeconomics is actually referring to this chart, which he believes suggests that the U.S. economy could be headed for some serious issues along the lines of prior crises as coronavirus fears bring businesses to a standstill across the country.

“With businesses and individuals reeling in the face of a shock of unknown — and unknowable — length and depth, we can’t be sure how they will behave, regardless of what they say,” Shepherdson wrote in a recent note. “Anecdotal evidence and company statements make it very clear that both business and leisure travel are collapsing, and it is just a matter of time before spending at restaurants, movie theaters, music venues and sports events drops sharply, too.”

He said that, just like in the wake of the 9/11 attacks and the financial crisis in 2008, a plunge in confidence and spending is coming, and it “will be big.” In fact, if it gets as bad as 2008, we could see a bruising two percentage points lopped off GDP, he explained.

But it likely won’t last as long, Shepherdson predicted.

“We expect the outbreak to be over by the end of May, and perhaps much earlier than that,” he said, “depending on the extent to which the emergence of warmer weather slows the spread, but even in the best case scenario it will take time for spending to return to normal.”

Meanwhile, President Trump has floated the idea of a payroll tax cut he says would offer “very substantial relief,” though Democratic lawmakers and even some Republicans have their doubts.

What does it all mean for investors?

“We remain firmly of the view that a sustained market recovery cannot begin until the number of new cases clearly has peaked, but that’s probably several weeks away,” Shepherdson wrote. “In the meantime, the numbers likely will get substantially worse.”

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