Global equity markets fell again yesterday (Monday 23 March 2020) after Democrats again blocked Donald Trump’s proposed US stimulus plan.
While this was disappointing, equity markets have this morning recovered the majority of yesterday’s losses on speculation that a fiscal stimulus deal will be agreed in the coming days as US lawmakers finally appear to be appreciating the developing coronavirus induced economic crisis.
As such we believe that ultimately an even bigger fiscal stimulus deal will be agreed, which should ensure households and companies have the liquidity to avoid widespread unemployment and bankruptcies.
While the passing of any US fiscal stimulus may not lead to an immediate equity market recovery, it should hopefully mark a low in the market by putting a floor under share prices – as the collective monetary and fiscal stimulus announced globally over the recent weeks should ensure a powerful rebound in equity markets when we finally get to the other side of this horrible coronavirus outbreak.
The problem is that at the moment no-one knows for certain whether the “other side” of this outbreak is weeks or months away – and as we have said previously, equity markets hate uncertainty and thanks to the scars from the global financial crisis in 2008/9, equity markets have tended to react disproportionately to any uncertainty or disappointment, hence the savage sell-off in equity markets over the past month.
However, if we use China as a precedent, Wuhan saw deaths peak just under four weeks after the lockdown (which led to Chinese equities initially recovering the majority of their losses) and the lockdown lifted four weeks after that – which suggests that Europe and the US could see economic growth quickly restarting sometime in May.
As we have previously said while we believe a recession is inevitable, the global monetary and fiscal stimulus should mean we only see a short, sharp economic contraction rather than a severe and protracted global recession. As a consequence, we remain positive on equities as we believe a lot of babies have been thrown out with the bathwater!
Investment Management Team