Is It Priced In?

What a week, eh? It feels as if my last dispatch at the beginning of the month was written a lifetime ago. The sell-off in equities was already severe by then, and I was in a buy-the-dip mood. My initial intuition proved correct; the rebound happened, as did the new low. My prediction of subsequent choppy sideways movement was brutally refuted, however, sell-off, a surge in volatility and dislocation across multiple markets to an extent not experienced the financial crisis.

There are so many things we don’t know, so let’s start with the few things we do:

Covid-19 is now morphing into a hit to the real economy not seen since the financial crisis. The virus’ foothold in Europe is strengthening, and country by country are now shutting down their economies in a desperate attempt to avoid the disastrous scenario unfolding in Italy. The U.S. and the U.K. are acting as if they’re somehow immune or different, I fear they aren’t. In any case, it is besides the point. The global economy is now in recession, and the scrambling action by fiscal and monetary policy is really just an attempt to prevent an economic shock turning in to a prolonged crunch with a wave of private sector bankruptcies and soaring joblessness.

I am sympathetic to Greg Mankiw’s attempt to do a quick run-through of the situation; a recession is inevitable, the focus should be on making sure the health system can cope, the latter which requires the adequate funding, and temporary measures to restrict movement and social interaction. This will be expensive—in terms of lost output—and governments should focus on creating a social security/support parachute for those sectors and workers, which are about to get hammered. Central banks, for their part, should step up as liquidity providers and lenders of last resorts. Market dislocations are unavoidable, but policymakers can make sure markets keep functioning, at least. Make no mistake, this has the makings of an extremely severe crisis if it is not addressed timely and with adequate care. It’s one thing helping households and firms through a rough patch, it’s entirely different mopping up after job losses and bankruptcies have swept through the real economy. In short; this doesn’t have to turn into a repeat of 2008 for markets and the economy as a whole, but it might. The jury is still out.


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Gary Anderson 4 months ago Contributor's comment

It may be too soon to bet on stocks. But I have accumulated some proof that the virus is weak. Somehow the Republicans know it is overblown.