Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
Physical Address
304 North Cardinal St.
Dorchester Center, MA 02124
The COVID-19 pandemic has made lockdowns, quarantines and social distancing the norm in much of the world, which creates massive uncertainty for investors.
With optimism about containing the pandemic fading, markets reacted violently to the rapidly changing environment. The bull market in stocks turned 11 years old on March 9. A few days later, the bull market was officially over, and the start of a bear market was declared. Gains didn’t hold. March 16 brought the biggest S&P 500 decline since 1987 with the S&P 500 falling by 12%.
COVID-19 is far less lethal than the SARS, MERS and Ebola outbreaks. The frightening thing about COVID-19 is that it spreads remarkably easily and can be spread by individuals who don’t appear to be sick.
The outbreak spread rapidly around the world. The pandemic creates a supply shock, disrupting the availability of goods. Demand for goods and services also is changing in response to the pandemic. Notably, economic activity that requires social interaction and/or travel is disappearing and is unlikely to resume until the outbreak is contained.
Another dimension of economic uncertainty is created by the breakdown in the OPEC Plus arrangement between Russia and Saudi Arabia.
Russia refused to slash oil production during a meeting with OPEC on March 6. In response, Saudi Arabia escalated the conflict by offering discounts to buyers and promising to pump more crude oil than ever. Russia said it too could raise output. Consequently, the price of Brent crude plunged by 24%, to $34 a barrel – the largest one-day drop in nearly 30 years.
This isn’t the first time that Saudi Arabia has tried to change the balance of power in the oil industry. Saudi Arabia’s production expansion in 2014 and 2015 flooded the market with oil but didn’t destroy the U.S. shale industry.
This time, the pain may be most acute for smaller, unstable countries dependent on oil revenue, such as Nigeria, Iraq and Iran. U.S. shale drillers will again come under pressure, putting stress on the high-yield bond market and on employment in the shale industry.
Russia and Saudi Arabia may have the financial reserves for a near-term price war, but the longer the conflict, the more strain on their budgets and domestic economies.
Encouraging news from China is the decline in the total number of new COVID-19 cases. Most large Chinese industrial firms have reopened their factories and appear to be making progress at returning to normal levels of productivity. China is planning a significant boost in public investment projects this year, reversing a multiyear falling trend in fixed-asset investment. Monetary policy easing is also significant, targeting easier credit for private and state-owned enterprises.
China is a major force in supply chains and as a consumer of commodities and consumer products. China’s actions in response to the pandemic should have a major impact on the pace of recovery throughout the world.
The COVID-19 pandemic is expected to cause a virtual collapse of economic activity in the second quarter, and full-year projections are for global gross domestic product to decline by more than 1%. That full-year global GDP estimate may be overly optimistic given unprecedented measures being put into place to curb the spread of the virus.
Consequently, expectations of a rapid V-shaped return to growth may have been overly optimistic and a slower U-shaped recovery may be more likely.
Economic activity and equity markets have historically recovered reasonably quickly from past pandemics. If COVID-19 creates a painful but temporary interruption of economic growth, a rapid equity market recovery is likely.
The primary risk for investors is that the pandemic causes widespread employment losses and business bankruptcies, creating more permanent harm to the global economy.
Policy decisions are critically important factors for investors to consider. The Federal Reserve and other central banks are taking steps to address the crisis, but fiscal policy has the potential to be a more powerful and effective tool to combat the pandemic than monetary policy.
Investor fears should ease if policymakers take powerful and convincing actions to prevent a liquidity crisis from becoming a solvency crisis.
Investors are often torn between the extremes of greed and fear at times like this. Market dislocations often provide opportunities to invest in good companies at “discounted” prices, but selectivity is important.
Cyclical or highly leveraged companies may face some challenges if the pandemic is long-lasting, however, some of the highest-quality companies may still not be that cheap.
Investors thinking about abandoning equities should heed the advice of Alpine Macro’s Chen Zhao: “The speed of the expected stock market rally could mirror how prices have fallen. This is the key reason why investors should neither try to time the market bottom, nor sell into the panic.”
The frightening headlines about the coronavirus outbreak may not fade for months. The markets, however, may turn long before the end of the crisis. Investors will be looking for a slowdown in the number of new cases, progress in the ability to treat victims of the outbreak and early indications that people can resume normal living.
As was the case during the global financial crisis, government policy will also be a major factor in investor sentiment.
Disclosures: Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable.