March 30, 2020

Coronavirus and The Global Economy: Yes, There Really Is Cause for Optimism

Coronavirus and The Global Economy: Yes, There Really Is Cause for Optimism

Sourced from Harvard Business Review and CNBC

Without doubt, the Covid-19 outbreak has become one of the biggest threats to the global economy and financial markets.

Since the outbreak, business leaders are asking whether the market drawdown truly signals a recession, how bad a Covid-19 recession would be, what the scenarios are for growth and recovery, and whether there will be any lasting structural impact from the unfolding crisis.

Major financial institutions and banks have already cut their forecasts for the global economy, with the Organisation for Economic Co-operation and Development being one of the latest to do so. The OECD also said it downgraded its 2020 growth forecasts for almost all economies.

Many factories in China are taking longer than expected to resume operations. That, along with a rapid spread of COVID-19 outside China, means that global manufacturing activity could remain subdued for longer.

“From an economic perspective, the key issue is not just the number of cases of COVID-19, but the level of disruption to economies from containment measures,” Ben May, head of global macro research at Oxford Economics, said in a report this week.

Declining Oil Prices

A decrease in global economic activity has lowered the demand for oil, bringing oil prices to multi-year lows. That happened even before a disagreement on production cuts between OPEC and its allies caused the latest plunge in oil prices. China, the epicenter of the coronavirus outbreak, is the world’s largest crude oil importer.

Why Stocks Are Rising on Terrible News

Despite the blow to the global economy, stock market action last week provided some indication that a bottom could be forming. And although it might be premature to declare the bear market dead, the market rose sharply after a historic surge in initial jobless claims, a move consistent with the end of bear markets.

Confusing? Not really. The thinking about bear markets dying on bad news is that the market is always looking ahead, and that an unfolding global recession has now been fully priced into stocks by investors.

“The markets and the economy don’t run in parallel. The market’s running way ahead of the economy,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “The markets don’t care about what’s happening today, the market cares about what’s happening six months from now.”

Could ‘Indiscriminate Selling’ Be Over?

Economists are expecting a steep fall for the U.S. economy in the second quarter that could exceed a 20% GDP decline, with some 10 million people out of work and an unemployment rate higher than anything the U.S. has ever seen.

But the latest jobless claims data offered the first test of whether investors would be willing to look through the bad readings and continue buying.

There was some speculation that one of the reasons for last Thursday’s rally was that the number, while much higher than the 1.5 million consensus, wasn’t as bad as some forecasts of up to 4 million.

Additionally, CNBC has reported that during the recent market tumble, executives have been buying their company stocks more than selling.

In addition, that the ratio of companies with insider buying compared to insider selling is at 1.75 for March, its highest level since March of 2009, according to Washington Service, a provider of insider-trading and data analytics.

While Morgan Stanley’s Mike Wilson sees best ‘risk-reward’ market in 2 years, stating investors should be taking advantage of the market’s steep coronavirus-driven sell-off from February highs.

More Positive Signs for Comeback

While financial experts expect the downturn to continue in the near term, most agree that markets will recover over the next few months. History has shown that the markets bounce back time and time again.

Federal Reserve Chairman Jerome Powell told NBC’s “TODAY” show last week that he sees a “good rebound” in subsequent quarters and pledged the central bank will do whatever it can to ensure that the recovery “is as vigorous as possible.” That’s exactly the kind of talk that raises hopes in the market.

Regardless of the Covid-19 distresses, economists believe the underlying economic indicators in the U.S. and China to be strong, adding that recent events are likely to “delay but not derail” future growth.

China, in particular, has already shown positive signs of recovery, having recorded a drop-off in new virus cases over recent days. Meanwhile governments elsewhere, including in the U.S., have implemented proactive fiscal measures to support their economies.

In Conclusion

The COVID-19 pandemic is a terrible and frightening situation. There’s uncertainty surrounding how long the outbreak will last, how bad it will get, and many other variables.

But we will get through it. Your stock portfolio will too. The most important thing to do now is take a deep breath and resist the urge to panic. Panic leads to irrational thinking, which leads to poor financial decisions.

Now’s the time to make some smart and rational financial decisions and focus on what’s really important — your health and the health of the people you care about.

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