In a matter of weeks, a tiny virus ­derailed the global economy, crushed the longest bull market in history and locked down the mighty American consumer. Now investors wonder how long it will take for the economy and the stock market to recover from what is the deepest economic downturn since the Great ­Depression.

Renowned economist Allen Sinai, PhD, says that after having fallen off a cliff, the stock market will have bottomed out by summer…and economic growth could resume by the fourth quarter of 2020. 

But that all depends on the course of the coronavirus pandemic. And it will take at least until 2022 for an ­anemic economic recovery to lift the stock ­market back near the record heights it hit in February, Sinai predicts.

In an exclusive interview, Bottom Line ­Personal asked Sinai to map out the likely path of the downturn and recovery and what it would mean for investors…

A Second Great Depression?

This is the biggest challenge that you will ever face as an investor and the most difficult challenge of my career to forecast what’s ahead. It feels like we’re on the verge of a second Great Depression in light of the enormous plunge in economic activity and the millions of workers who have suddenly lost their jobs. 

However, the years ahead are unlikely to play out like the period starting in 1929. Back then, a stock market bubble burst and major economic policy blunders followed the crash, leading to the Great Depression during the 1930s. It took 24 years for the market to reach new highs. 

In contrast, the current ­economic crisis was triggered by a cataclysmic ­“external” shock that suddenly unraveled what had been a US economy that was in good shape. I believe this year’s massive rescue packages from the Federal Reserve and the federal government will provide enough short-term relief to prevent what is sure to be a painful onslaught of defaults and bankruptcies from escalating into a second Great Depression.

The Shape of a downturn and Recovery

Assuming that the spread of the ­coronavirus has begun to recede by late summer, as the economy reopens, the devastating global downturn that began in the first quarter likely will end. It likely will yield to the start of a tepid recovery by the fourth quarter. Consumers will remain ultra-cautious even with the promise of a new vaccine and treatments. They will be slow to return to restaurants, theaters, arenas, flights, cruises, gyms and other public gathering spots. Many of them still will be unemployed and financially wounded. Many businesses that survive will be under financial stress, especially those that are burdened by swollen debt loads.

Think of it as an L-shaped ­economic path, with a fairly flat recovery after a steep plunge—rather than a sharp V-shaped slide and strong, quick rebound.

Stock market volatility will remain extraordinarily high as investors worry about the potential for new waves of the virus as well as persistent recessions in many economically weaker parts of the world. For several years, subdued US corporate earnings growth will likely lead to single-digit annual stock market returns, at best. Considering how far the stock market has fallen, it may not return to the February 2020 highs at least until 2022.

Important: I cannot stress enough that the virus is the timeline. If it turns out that the US has failed to prevent the coronavirus from spreading past six months, we could see a much steeper rate of defaults and bankruptcies—even with further steps taken by ­Washington to cushion the blows. In that scenario, recovery for the economy and stock market would not start to gain traction until well into 2021. 

Key Economic ­Indicators

Here’s what I expect for the rest of this year and beyond…

Gross domestic product (GDP): In the second quarter of 2020, the economy likely will have shrunk at a 14%-to-17% annual rate, the biggest contraction since 1932. The third quarter is likely to see a contraction of 8% to 10%. But in the fourth quarter, I expect 1% to 2% growth, marking the end of the recession. For 2020 overall, GDP likely will have contracted by more than 6%. There should be a modest rebound in 2021—at least 3% ­annual growth. 

Inflation: As measured by the index of personal consumption ­expenditures—the Fed’s preferred measure—the inflation rate should be negative for 2020 and just 1% for 2021, in part because of this year’s collapse in crude oil prices. At the end of 2020, I expect oil to trade at $30 to $35 per barrel, down about 50% from the beginning of this year. That’s because of the severe drop in demand resulting from the effects of the pandemic and global recession…and the Russia–Saudi Arabia oil price war that helped create a global ­supply glut. 

Unemployment: In December, the unemployment rate likely will have soared to 16%, the highest since the 1930s, compared with 3.5% last December. By the end of 2021, the unemployment rate should be down under 10%.

Outlook for Stocks

Stocks in 2020 will have their worst year since 2008. I expect the Dow Jones Industrial Average to have lost 11% even after accounting for dividends. The S&P 500 likely will lose 10% for the year. These dismal returns reflect the collapse in corporate earnings. Earnings for S&P 500 companies likely will be down 20% in 2020 and likely will gain just 10% in 2021. 

Long-term investors should avoid adding aggressively to stock investments until this summer and should hold off further if the end of the US economic downturn still is not in sight. Even then, plan to “dollar-cost average,” as many 401(k) investors do—that is, invest steady, even amounts each month so you automatically take advantage of price dips. You may miss out on some of the gains, but it’s better than risking a further plunge.

Best sector for the recovery in 2021: Favor technology companies, especially software, Internet and cloud computing companies  and other “disruptive” companies whose products and services were already changing the way many businesses operate and individuals live—a trend that is accelerated by the­ ­pandemic. 

Avoid these sectors: Energy, which could see widespread failures among US oil producers as demand and prices remain depressed…and the consumer discretionary sector, including cars, travel and leisure, as consumers continue to stay home more than before and as they remain cautious about spending.

Outlook for Bonds

I expect the broad US bond market to end 2020 with total returns near 3% for the year and to be flat for 2021. Bonds offer preservation of capital at this point but no capital appreciation and very little yield. I expect the 10-year US Treasury note to continue yielding less than 1% toward the end of 2020 and into 2021. For risk-averse fixed-income investors, cash is king. They will find better returns in online FDIC-insured money-market and ­savings accounts.