Market Update – Coronavirus (April 28th)

After the initial, strong, rebound from the March lows to mid-April, in the past two weeks, equity markets seem to be moving sideways. Global financial markets are now already discounting the severe economic impact of the worldwide Coronavirus lockdowns, but also that restrictions are now gradually being eased as the virus situation has stabilized, or is even improving, in many countries (see FT chart below).

S&P 500 Index

Financial Times

It is probably fair to say that financial markets are now in ‘wait and see’ mode -- investors are now looking to observe how the economy will restart and what the medium to long term implications might be. In a previous note, when referring to expected first-quarter corporate earnings announcements, I said that hopefully, we may be able to learn something from what company executives say about the future. Unfortunately, that is not happening – with uncertainty still very high, almost 90% of reporting companies (around a third have reported so far) have withdrawn guidance about the future.

As the financial system remains stable and functioning (thanks to aggressive and rapid central bank response this time around) and physical infrastructure is intact (in contrast to post-war or natural disaster situations), there are many parts of the economy that can come back fairly quickly. However, it is also clear that in certain areas, recovery will only be gradual and partial at best. Consumer spending, the most important economic driver in most advanced economies, will be held back by the fact that restrictions on parts of the older population will remain in place for longer. In the US, for example, people over 55 years old account for 40% of consumer spending (see Deutsche Bank chart). General consumer behaviour will also change in many ways (whether temporarily or permanently is yet to be seen) – see CBS News poll results below.

So, after the initial impact and market reactions, we have probably entered the second stage of this market crisis, where, investors are now waiting for new information in order to better assess the economic and market outlooks. Uncertainty and market risks are still high and we remain vigilant.

Best,

Eran Peleg