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Markets cheered as COVID-19 cases slowed, policymakers swiftly intervened on an unprecedented scale and economic activity and employment picked up. Anticipating a fast recovery, the S&P 500 rose 20.5% over the quarter.
While GDP is forecast to swing to 20% annualized growth in Q3 from a likely 30% contraction in Q2, we do not expect a V-shaped recovery. The pandemic has scarred business activity and employment and it could take as long as 10 years for the U.S. economy to reach its long-term output potential.
Short-term bond markets recovered substantially in the second quarter; Libor rates declined materially as risk aversion cooled and money flowed back into prime money market funds.
The pace of the recovery will be determined by the pandemic, the public health response and policymakers’ additional measures.