March was the worst month for global financial markets since the Great Financial Crisis of 2008. Prices of most financial assets dropped, in some cases significantly, as the global economy came to a standstill as a result of government action around the world to combat the spread of Coronavirus. Global equities, as measured by MSCI AC World index (in US dollar terms), fell by -13.5% in March, and have now dropped by -21.4% since the start of the year. The monthly move, although significant, does not even fully reflect the damage done in the earlier part of the month, when market volatility reached extremes and market liquidity dried up. Over the last 100 years, there have only been 3 other occasions where volatility in global markets has spiked as quickly as in March 2020: the 2008 financial crisis, 1987 stock market crash, and the 1929 Great Depression. That said, although the past week or so has brought additional bad news, there was some good news as well. The bad news was further evidence of the scale of the economic impact of government action to contain the spread of the virus. The good news is that decisive Fed, ECB and other central bank action has significantly improved financial market liquidity (though funding pressures still persist in selected markets) and bond markets are starting to function properly again. In fact, highly-rated US corporate bond issuers raised $110.5bn last week, a weekly record. Another sign of market strength: The State of Israel issued, for the first time ever, $1bn of 100-year bonds (plus an additional $4bn of 10 and 30 year bonds). On the economic activity front, as many major economies have come to a near standstill at once, we have probably witnessed the largest quarterly decline in activity in the modern era. According to an assessment by the OECD, the initial impact of containment measures is expected to amount to 20-30% of GDP in major economies. The scale of the estimated decline in the level of output is such that it is equivalent to a decline in annual GDP growth of up to 2 percentage points for each month that strict containment measures continue. If the shutdown continued for three months, for example, with no offsetting factors, annual GDP growth could be between 4-6 percentage points lower than it otherwise might have been. Emergency government fiscal plans, often amounting to between 3% to 10% of GDP, are intended to partially offset this impact.
As noted previously, given the significant drop in economic activity, the news on this front is expected to be bad for quite a while. However, it is important to note that financial markets should start to recover much earlier than the economy. History shows -- see chart below from Capital Economics -- that equity markets typically lead the economy by several months.
Finally, we are seeing some encouraging news on the Coronavirus front. After we have seen stabilization/moderation in the spread of the virus in China and Italy, we are now seeing a similar pattern in Spain as well. The number of daily new cases and deaths in Spain is no longer rising (see chart from Financial Times). This, again, supports the view that government containment measures are working and that, eventually, we will see an end to this crisis.
Stay healthy, Eran Peleg