So Far, So Good, but What Moves Markets Now?
Author: Kevin McCreadie
April 15, 2020
AGF’s CEO and Chief Investment Officer offers a wide-ranging take on what is and what is not resonating with investors as markets fight back against the economic ravages of the COVID-19 pandemic
Markets rallied big again last week. Does the recent run seem too good to be true given the global economy is effectively shut down?
Markets haven’t been moving so much on economic data as they have on the massive amounts of stimulus measures being announced and, most importantly, the changes in COVID-19 data rolling in. This has been true from the start and investors shouldn’t expect that to necessarily change. It’s no coincidence that the rally of the past few weeks coincided with promising news about the number of new cases, first in China and then in parts of Europe. And over the past few days, the Centers for Disease Control and Prevention said the outbreak has stabilized across the United States and Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases in the U.S., said parts of the country may be ready to ease emergency measures in May. That’s all very encouraging and yet investors can’t be complacent. It’s still likely going to be months, not weeks, before economic activity in back to normal and even that is still in doubt if there is a second wave of the disease. Remember, China was reporting zero new domestic cases a couple of weeks ago, but just locked down Harbin for 28 days due to a growing number of imported cases.
Does that mean investors should place less emphasis on economic data?
Not necessarily. But they need to be discerning about it and not get caught up in the big headlines. The same is true of earnings season. A lot of the numbers that will be reported in the next few weeks won’t reflect the severity of the current situation because the impact of the pandemic only really started to take hold at the end of the first quarter. So, like with some of the economic data rolling in, it’s less important what just happened and more important what’s in store down the road. Company guidance will be critical because it’s going to give investors an expectation for what to expect over the next few months, including whether companies are going to need to cut their dividends or take some other action to get through this storm.
This might seem like an obvious question, but are we headed for a recession?
I think it’s a foregone conclusion that we are going to be in a recession this quarter and the magnitude of it is likely to be staggering. I’ve seen forecasts ranging from anywhere between a 15% drop in growth to 50%. Those are huge numbers, but the market can shrug the magnitude of that off if the pandemic is contained and its impact to the economy is short-lived. I’m not sure we’ll see a V-shaped recovery like some analysts are predicting; I think it could be more of a U-shaped scenario, or worse, a W-shaped recession if there is a second wave to the virus. But once there are signs that the economy is truly getting back on line, markets will move with it, almost akin to the often swift rebounds that result following a natural disaster or hurricane that can shut down regional economies for a period of time.
In the interim, is there enough stimulus in the system to support markets?
I think markets are happy with both the fiscal and monetary responses from around the world to date, and there’s good reason to believe that more stimulus is on the way if needed. The bigger issue is how quickly and efficiently the stimulus that has been announced to date – and what likely is still to come – can be put to work efficiently. As I’ve said before, this isn’t about stimulating economic activity as much as it is about helping small businesses and individuals keep the lights on until such time that life gets back to normal. And speed matters as much as size now that we are in the next phase of the crisis.
Should markets be worried about how much governments are spending to stem the current economic crisis?
Longer term, yes, but not now. This is like triage and there really isn’t a choice but to focus on what is needed to keep the economy afloat. It will only start to become a concern when we’re through this and back on stable footing. Even then, the appetite for having large deficits has never been greater than it is now and if interest rates remain low, there may be ways to finance it over time.
You mentioned low interest rates. Investors should be used to this type of environment by now, but what challenge does the recent slide in government bond yields bring?
At this juncture, the opportunities in the bond market are not going to be in sovereigns, but in credit markets. Investment grade corporate bonds and select high-yield credit are starting to look more attractive after selling off earlier in the crisis. This is also true of emerging market debt. On the equity side, investors are going to have to pay close attention to dividend payers. A lot of companies are not going to be able to sustain their payouts, but those that will are offering a pretty attractive yield following the selloff. Ultimately, a low-for-longer mantra regarding interest rates is not going away in the near- to medium-term and it will be important that investors consider a range of different yield-bearing securities going forward.
Finally, Bernie Sanders dropped out of the U.S. Presidential race last week. This would normally be market-moving news, but the election has taken a back seat to the pandemic. Is that at all surprising?
Not really. Investors have more to worry about than what impact the election might have on markets. I think that may stay the case until people go back to work or feel like they’ve settled into a more regular routine again. It’s interesting though. With no debates and all the primaries having gone online, President Trump has had a nightly opportunity to address the U.S. electorate and Joe Biden has become almost invisible. Of course, whether that favours the President’s chances of re-election remains to be seen.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
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