Market Update – Coronavirus (April 1st)
In my previous update, I addressed the question of whether or not last week’s jump in equity prices is the start of a market recovery – and stated that it is too difficult to say. Since last Thursday, it seems that the recent advance has stalled, with markets resuming a more volatile two-way pattern. This is consistent with my view that the recent jump in prices was mainly a reflection of the reduced risk of this turning into a broad financial crisis, rather than any meaningful improvement in the economic outlook.
As explained previously, market-bottoming processes usually involve short ‘bear-market rallies’ in which prices rise, sometimes even considerably, just to then fall back to previous, lower, levels. The following table (from Barclays Research) provides some historical perspective on previous instances where US equities posted big jumps (“Max Head Fake”) in the context of broader bear markets (“Bear Market Low”).
As already expected at this point, as countries apply increasingly aggressive measures to contain the spread of the virus, the economic news continues to be negative. On the other hand, the global economic and financial policy response to the Coronavirus crisis scaled up at an impressive speed. The US has agreed on a relief package worth about 10% of GDP, and the Fed has already cut rates to near zero and restarted quantitative-easing. Efforts to support funding and liquidity have also expanded rapidly and can grow further now that the Fed has new capital from the Treasury to lever up. Shifts outside the US look similarly encouraging. In Europe, the European Central Bank enlarged its bond purchase program and eased some self-imposed constraints to assure markets it could flexibly respond to the evolving crisis. And on the fiscal front, major European economies plan easing measures of 2-3% of GDP, and loan guarantees of 15% of GDP or more. Many emerging market economies have announced fiscal stimulus and cut policy rates as well. These policy interventions cannot prevent recession—it is already in train in many economies. But they do help limit the damage, and may reinforce the rebound once the virus has been contained.
China Caixin Manufacturing PMI Index
Having said that, this morning it was announced that the China Caixin Manufacturing PMI index, a gauge of manufacturing activity in China, rebounded sharply in March from February’s abysmal levels. The index’s rise to 50.1 from 40.3 suggests that the contraction in activity has already bottomed-out (although weak foreign demand and labor market strains remain headwinds to additional improvement). This is good news, and coupled with continued moderation in the spread of the virus in Italy, leads us to believe that there will eventually be a way out of this health and economic crisis.