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Navigating the Coronavirus – Part 2

This week the Dow Jones Industrial Average (The Dow), which is the oldest U.S. stock market index, posted its biggest single-day percentage gain since 1933, up over 11% in one day!

Volatility both ways (up and down) remains off the charts with all of the year’s best and worst days happening in March.

So what is happening?

Central banks and governments globally are pulling out all the stops to stimulate the economy, to slow or minimise the financial effects of COVID-19.

Boris Johnson announced a significant series of measures to financially support employees, self-employed, companies, mortgage holders and renters – I have written a number of posts separately on the details of these on www.LexingtonWealth.co.uk/coronavirus

The stimulus packages have not been limited to the U.K., in the U.S. the Federal Reserve, Congress and President Trump all agree on one thing, that they will do whatever it takes (almost!) to keep the economy going.

You see, it’s easier for them to keep the economy ticking over than it is to allow it to collapse, and then face the fall out from this and then ‘try’ to stimulate it again, that is what happened in the 1930’s.

The U.S. support for this is different than it was in the 2007/8 financial crisis, they reacted slower then and allowed companies to fail e.g. Lehman Brothers and AIG.

They have stated that they “learned from the past” and are willing to intervene earlier and in a far bigger way. This week they did just this by aggressively supporting the bond markets, cash system and banks.

This week President Trump publicly stated that he wants everyone back to work within weeks, “not months” – I’m not sure he’s going to get his way on this unless it’s several weeks!

Congress just passed a $2 Trillion Coronavirus spending bill unanimously 96-0!  I don’t think that’s ever happened!  They are calling this a survivor bill.

As a comparison, the U.K.’s Coronavirus package is close to £65.5 Billion, including the £9 billion support for the self-employed announced yesterday.

Because of the significant drop in credit/money supply in the economy, these massive stimulus packages are needed and will be swallowed up by the economy, and inflation is unlikely to move.

We follow the U.S. markets, at least as much as the U.K., because the U.S. is 52% of the overall world stock market and as the old saying goes, when America sneezes the rest of the world catches a cold, it’s not quite that, but when the S&P and Dow jump in value on the back of a stimulus package, so do your investments.

But, please know this is not over.

Every bear market has at its core an issue that must be resolved to move forward. With the 911 pullback, the bear market could not recover until people felt safe again. That took time, and only then did the economic incentives work to pull the economy and the markets into recovery.

With the 2007/8 financial crisis, the bear market couldn’t recover until there was a certainty that the banking system would survive and continue to function. After the banks were stabilised, the economy and the markets began to respond to incentives.

What we have today is no different, at the centre of this is a health crisis. COVID-19 continues to spread, and numbers continue to rise, this week America became the country with the most recorded cases of inflection, and I believe this will continue.

The markets are fearful and hence volatile until we remove that fear, we will continue to see market volatility.

To see a sustainable market recovery, we expect first to see an indication that the coronavirus is under control. Note that it doesn’t actually have to be under control, the economy and markets just have to believe that it will be under control in the near future.  The markets are always forward pricing in the available information.

Many things can initiate that feeling, from potential treatments, a vaccine (according to the World Health Organisation, there are over 20 vaccines in development) or a plateau or deceleration of the infection rate.

But I expect much larger number first from America, before this occurs, the U.S. is not following procedures like China and South Korea to achieve success, i.e. total lockdowns and massive testing and tracking.

So, cutting through all the noise, where are we?

The bottom line, the problem COVID-19 is still here, highly contagious and at the current infection rate may overwhelm many health care systems globally.  Given that almost everyone knows this, why is the market reacting positively to the financial support packages?

Before COVID-19, the U.S. economy was exceptionally strong. Unemployment was very low and the earnings were very high.  As with all bear markets, this will pass.

Economies weaken during bear markets when there is widespread fear, everyone reduces their spending and economies slow. This makes some bear markets scarier than others because everyone goes from worrying about the root cause (safety after 911, lending after 2008, or COVID-19 now) to worrying about whether the system will even survive.  The Governments and central banks globally are doing what they can to take that fear off the table. They are aware we are all in a transition period and the stimulus packages provide us certainty.

How long will all this last?  The answer to that can be answered only by resolving our core issue, the campaign against the coronavirus.  That reality has not changed. Until it does, there is no time for celebrating.  While we know it will pass, the reality is the crisis is not over yet.

The Chief Medical Officer Chris Whitty has said the peak may be in June, but more recent reports suggest this may be as soon as Easter.  Once the virus is under control, market normality will resume.

 
 

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