As we publish our Economic and Public Market Update for the first quarter of 2020, it is obvious that the first quarter was a wild ride. It included US stock markets reaching all-time highs and ended with the fastest 20% market drop on record. The drop, spurred on by the coronavirus pandemic, put an end to the longest bull market in history.
While nothing compares to the loss of human life, the economic toll of the pandemic and the practical shutdown of the economy has been significant to say the least. The full impact is still playing out, including whether we can achieve the V-shaped recovery we all hope for, but the economic results began to deteriorate in the final weeks of the first quarter. Advanced estimates of the first quarter GDP came in at -4.8%, marking the first quarterly decline since 2014. Estimates for second quarter GDP project a decline of more than 30%.
The stock market, which focuses more on the value of future earnings over the long-term, has bounced back faster than the economy. After being down significantly at the end of the first quarter, the major market indices rebounded in early Q2. In fact, the tech-focused NASDAQ went positive – at least temporarily - for the year in mid-May. The impact of the slow down on the valuations of public companies (see page 7 of the report) varied significantly by segment. The multiples of EBITDA for industries like food service and protein processing dropped by half or more, while multiples for healthcare IT, financial technology, and trucking remained relatively consistent. These returns and multiples are fluid and will likely change as second quarter operating results are recorded and as the market reacts to evolving social distancing, sheltering, and related measures.
Similar to the stock market, we expect the economic recovery to be uneven. Certain industry segments are seeing strong results during the crisis, while others may recover quickly once pent-up demand is unleashed after consumers are able (and comfortable) to leave their homes again. Some segments will take years to recover and may be fundamentally changed forever. The country’s entrepreneurial spirit and ability to innovate have been on display as companies have adapted their business models and work methods to the current realities, and we expect that to continue. We expect companies will focus on being more capital efficient, streamlining their operations, and spending more time on contingency planning.
A copy of the full report is available here.