The S&P 500 lost more than 4% of its value yesterday as President Trump warned there could be up to 240,000 deaths from COVID-19 in the US. With the VIX remaining close to record levels, moves of this magnitude, in either direction, are likely to occur at least once a week. This week’s NBS PMI data for China, which pointed to a modest recovery in both manufacturing and non-manufacturing activity in March, remind us that a V-shaped recovery is attainable. In this world equity prices and economic activity return, within twelve months, almost to levels that might have been expected had the virus never emerged. At the same time, substantial downside risks remain. If COVID-19 returns with equal, or greater vigour once the restrictions holding back economic activity are lifted, then a severe financial crisis and a prolonged economic slump will be hard to avoid. In our view, the outlook for the global economy, and for financial markets, is close to bimodal. It’s either a ‘V’ or an ‘L’ with more or less equal probability. There’s not much in between.
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