WeekWatch 06/04/2020
First, stocks swooned. Then they began to rise again, as governments and central banks unloaded their fiscal and monetary arsenal – the latter reckoned to add up to several trillion dollars in aggregate. Last week, investors experienced a reality check, as a slew of key indicators pointed to the depth of the economic damage already brought about by virus mitigation measures. An estimated 29% of the US economy has now fallen idle, according to Moody’s analysis, and the global economy is in its sharpest slide since the Great Depression.
Yet what perhaps dawned on investors above all is that the virus’s trajectory is nigh on impossible to predict – even for the epidemiologists. The S&P 500’s direction varied over the five-day trading period, ending somewhat down; its course reflected the disquiet that comes with investing through a period utterly dominated by a virus that we are only beginning to understand. The FTSE 100 and EURO STOXX 50 both finished slightly down, too. The VIX, which measures volatility on the S&P 500, may have retreated from its 80-plus high of mid-March, but it still ended the week only just below 50 points. The index’s long-term average is 20.
Nevertheless, some investors identified the nature of the problem earlier than others.
“Modern market history provides no meaningful reference points for the current crisis – the scale of the potential economic damage is bigger than anything else we’ve seen,” said Hamish Douglass of Magellan, manager of the St. James’s Place International Equity fund and co-manager of the Global Growth fund, speaking last week. “As a result, market behaviour, both during the crisis and in the recovery, could be very different too. Anyone who thinks that markets will react in the same way that they have in previous setbacks – the global financial crisis, for example – may well be mistaken. There is no effective playbook. The extent of the potential economic damage here is unique.”
That damage is becoming increasingly plain for all to see, both on markets and in the global economy, as the virus infection numbers continue to rise. The first quarter of the year ended last week with the S&P 500 down 20%, the Nasdaq down some 14% and the Dow Jones down 23%. Last week, the number of infections worldwide rose to more than a million. What was initially a Chinese story, and then increasingly a European one, has since turned into an American tale, with 40% of new cases now emerging in the US.
Indeed, there have now been more than 330,000 cases in the US and close to 10,000 deaths. The US is projected to need 80,000 more beds than are currently available to deal with new cases, as the size of the daily rise in numbers continues to increase. In some cases, extreme measures are being taken, as when a US navy ship recently provided an extra thousand beds by docking in New York harbour.
The US president warned last week of “three weeks like we’ve never seen before”, projecting between 100,000 and 240,000 US deaths from the virus.
Moreover, lockdown measures are not only emptying some of the world’s most popular sites (witness New York’s Central Park last week, pictured above); they are already hitting economic indicators, too. Last week, US jobless claims rose by 6.65 million in the week ending 28 March; their previous record weekly rise had been 695,000. The FRED Economic Policy Uncertainty Index struck a new high last week, while US retail sector furloughs have now been taken by half a million workers. Yet it remains possible that a rapid fall will yet be matched by a rapid recovery.
“Unlike the Global Financial Crisis, we do see a relatively rapid bounce back,” said Keith Wade, Chief Economist at Schroders. “After the downturn in 2008, it took just over three years for the US economy to regain the level of GDP achieved prior to the crisis; one of the slowest recoveries on record. Growth was held back by the unwinding of the debt bubble, which meant that banks and households were focused on reducing their borrowing. This time [we see] the US returning to its previous level of activity in the third quarter of this year. Such an outcome reflects expectations of the lifting of restrictions on movement and the return to work as business restarts, shops re-open and normal activity resumes.”
While the US may be the new epicentre, Europe is feeling the full political and economic effects of the virus, too. There were signs last week of the spread slowing in several European countries (Sweden and the UK were among the exceptions), just as the possible political and economic costs began to show themselves more clearly. All the same, expectations that lockdowns across Europe will soon be eased lifted stocks in early trading this week, taking their cue from Asian stocks a few hours before.
On an economic level, the scale of contraction has been breathtaking. Italy, Spain, France and Germany in March all reported PMI readings for services and manufacturing that were the worst since they began 20 years ago – broader eurozone indicators were similarly grim. A particular lowlight was Italy’s services PMI, which fell from 52.1 in February to 17.4 in March. (50 indicates no change.) In the case of the UK, Capital Economics now believes unemployment will crest above 6%.
“The confirmation that the economy stagnated in the fourth quarter of 2019 shows that it was very weak even before the spread of the coronavirus in the UK,” said Capital Economics. “We expect a 15% quarter-on-quarter fall in GDP in the second quarter and things could easily be worse.”
Politically, leadership and unity in Europe both look fragile. In the case of the EU, the closure of borders has highlighted where power lies, and tussles over pooled funding perhaps come as no surprise. When nine countries floated the idea of a “corona bond”, Germany and the Netherlands rejected the idea. Last week, Brussels said it now wants the power to tap international markets to raise €100 billion in loans to help stricken countries with unemployment reinsurance; the Eurogroup will meet (virtually) on Tuesday to reach a deal.
In the UK, meanwhile, the government faced increasing criticism, even from its erstwhile newspapers of choice, over its slowness (relative to European peers) to impose restrictions, provide protective equipment to NHS workers and, above all, to roll out testing.
The sense of political flux only intensified on the news that the prime minister, still struggling with the virus, was admitted to hospital; and on Keir Starmer’s selection as leader of the Labour Party, which he began by immediately striking a more conciliatory tone towards the government than his predecessor.
Magellan and Schroders are fund managers for St. James’s Place.
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