Investors can cope with a lot of bad news if they think they can see light at the end of the tunnel. The problem with the coronavirus is that there’s still only darkness ahead. That’s why a precipitous drop in economic output in the second quarter isn’t the worst thing they have to worry about.
Increasingly stringent public health measures to control the outbreak of the disease are wreaking havoc on economies. Goldman Sachs analysts, for example, expect U.S. GDP will plunge 24% in the second quarter on an annualised basis, a decline they say would be two and a half times the size of the previous post-war record. That pales in comparison with the 50% drop evoked at the weekend by St. Louis Federal Reserve President James Bullard. The Institute of International Finance said on Monday it expects the global economy to shrink 1.5% in 2020, approaching the scale of the contraction seen in 2009.
That’s dire. But the depth of these contractions probably matters less to investors than how long they might persist. Take the global financial crisis: the MSCI All Country World Index and the S&P 500 Index of American shares started rebounding in March 2009, well before economies had started healing, as money managers began to grow more confident that U.S. and Chinese stimulus would do the trick.
Such assurance is in short supply this time. Monetary policymakers are doing all they can. The Federal Reserve’s mega-package of measures on Monday was the latest example of the unprecedented steps being taken around the world. “Don’t fight the Fed” is usually sound advice to heed in financial markets. But not when the central bank is up against a virus and there are worse scenarios imaginable.
For example, lockdowns could become more draconian and entail closure of all but the most vital production, as was mandated in Switzerland’s Ticino canton over the weekend. Or governments could embark on a stop-start regime of shutdowns, which go on for the best of a year pending the development of a reliable vaccine. Worse, central banks might run out of effective weapons to help the economy and soothe markets, whether they admit it or not. Until these still-unlikely scenarios can be eliminated from the horizon, investors have little reason to emerge from their bunkers.
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