Nations have begun accelerating the “reopening” of their economies with many stay-at-home orders being lifted in the United States and partial lifting being implemented around Europe. Some European schools have even resumed normal classes. Financial markets have applauded these moves with the benchmark U.S. S&P 500 rallying to over 2,900 points in recent days. The index had traded below 2,200 in late March, down from a high of nearly 3,400 only weeks earlier. While many coronavirus figures appear to have peaked around the world, is it because of these very same stay-at-home orders that they peaked? Will lifting them lead to a second wave of the virus, which will only prolong its existence? I believe so.
The Spanish Flu lasted nearly three years, as I’ve written in previous columns. SARS and MERS also lasted nearly two years. Why are financial markets assuming that the coronavirus will die out much earlier? While central banks have been one of the largest buyers of debt securities in recent weeks, the Federal Reserve hasn’t publicly announced equity purchases, unlike other central banks. The Bank of Japan has intervened in equity markets and now owns over 5% of Japan’s publicly traded firms. While the Fed did intervene during the 2008 crisis, it has not yet intervened in equity markets, so why are equities rallying? Investors are fearful of missing the post-corona rally. I believe we will ultimately get a post-corona rally, but that won’t happen until either a vaccine has been found or other medicines that lessen the potential symptoms of the disease are developed.
While markets may be buying into a global post-corona recovery, the long-term impact of the millions unemployed has yet to be seen. Coupled with permanent long-term demand destruction, markets may have acted way too soon in buying into this rally. Will more firms opt for telecommuting? Will offices be a thing of the past for some industries? Anecdotally, premium London office space has seen a 15% drop in demand so far, for example, and this trend may very well continue. Now imagine a second wave of coronavirus deaths hitting in late June? This would lead to a shuttering of economies for the summer, meaning seasonal businesses would be all but wiped out by the fall. This would mean more central bank bailouts where possible.
There are those countries that don’t have the advantages of being able to implement quantitative easing with “hard currency.” What are they to do? Brazil and South Africa, for example, are the hardest hit of major emerging markets. How do they recover without long-term financial aid from the International Monetary Fund (IMF) or other institutions? What will these lenders want in return for such aid? Does the political will exist for entering into such agreements? All of these are questions that lead not to more answers, but to more questions.
