The current health crisis is undoubtedly the most significant social and economic shock the world has seen in many decades. In addition to the difficulties in predicting the path of the disease and the extent of the shutdown of the world’s largest economies, there are two further sources of uncertainty for investors. The first is the possibility that parts of the global economy have ‘pre-existing conditions,’ including high debt, low interest rates, inflated asset prices, and income and wealth inequality. The second source of uncertainty is that this is the first and the only time since WWII that both aggregate demand and aggregate supply are shocked at the same time. The policy prescription to deal with such an event needs to be very different from the response to ‘normal’ setbacks in demand.
Having said the above, policymakers have demonstrated that they are willing to go ‘all-in’, using all the financial assistance that may be required to mitigate the impact of the health crisis. The Fed led a global pivot in the global monetary policy stance, twice cutting rates intermeeting and announcing a swathe of funding measures aimed at reducing the USD scarcity, which threatened the effective functioning of a number of primary markets that underpin the global financial system. This was followed late in the month by the USD 2 trillion fiscal package. These rapid and drastic measures were matched in many nations across the globe, in an unprecedented effort to mitigate the social and financial impact of widespread and enduring shutdowns of the world’s largest economies. The amount of stimulus injected into the system already overwhelms the response to the GFC; and there will likely be more to come.
In our view, assuming a path for the disease will look not too different from the general contour of the experiences in China and Asia, and that the science eventually catches up and changes the shape of the infection curves, equities and risk assets may have already bottomed, and risks are biased to the upside from here in the coming weeks, even if we are to see another brief dip lower in equity prices. In the 15 US recessions of the last century, the median lead time between the low in US equities and the low point in the US economy was four months. Thus, even though we might still be in the fourth inning of the health crisis, and in the third inning of the economic downturn, we are probably in the ninth inning of the financial cycle.
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