Indeed, what else. This word was simply unknown up until early January, yet each human being seems to be pronouncing it at least half a dozen times per day. No need therefore no explain what it is and how countries have been approaching the issue. Let’s focus of the effects of the virus on market expectations, with the hope to shed some light, or at least begin to think about the not so distant future. Several opinions and scenarios are rolling out in front of us as we speak.
Positive scenario
Let’s start on a positive note. Are we kidding? Stock markets dropped an average of 20 plus percent in the first quarter that just came to a close. Oil a whopping 60%. Most economies that started to feel a very timid slowdown are now forecasting a 2 to 3 percent drop in the GDP by the end of the year and just during the month of March 3.5 million Americans applied for unemployment benefits. Seems like 1929 all over again. Haven’t we seen enough? A robust rebound is definitely around the corner and a rolling recovery will be replacing the rolling bear markets the world forecasted only a few months ago. Only the brave is the mantra for some reputed analysts and money manager such as Morgan Stanley. A market bottom is now forming. Should we wish to buy low, now is the time for once the turnaround starts, it will be too late. Volatility reached points higher than those of the 2008 crisis and as much as the number of infections will still grow both in Europe and the U.S. the time is now, but of course not for the faint of heart. Only the braves.
Negative scenario
Others tend to be much less optimistic. Sure, the markets went down a lot, but volatility hasn’t yet settled. A 10% downswing today may be the catalyst for an 8% upswing just tomorrow, and of course another 7% drop the day after. Rollercoaster scenario with three added (negative) perks: the coronavirus-led economic damage, extremely high level of debt due to a long season of low interest rates, and the same rates that will further negatively impact the economy when they will rise. All ingredients for persistent bear marker season, a sort of “pay-back time” for the longest period of bull market in history. Business and commerces have been hard hit, and their recovery will not be fast, especially considering the loan repayments they will need to honor and the huge amount of debt that has been added. On an institutional/sovereign side many countries will suffer to repay the debt they have been issuing and further local crisis will brew. The advice here is “sit still and weather the storm”.
A bit of technical analysis
Let us approach the issue more rationally with the help of technical analysis: the dead cross factor. When the 50 days moving average goes under the 200 days one, technical analysts speak of “dead cross”. This configuration, as a general rule, is a signal for the bear fast approaching. See the following S&P 500 and Swiss Performance Index Bloomberg chart for a better visualization.
Careful though: during the past ten years we witnessed a dead cross formation several times already, but no correction occurred, meaning that a dead cross could be a false signal.
Our personal view
What now then? Positive? Negative? Follow the technical? My personal hunch suggests caution, extreme caution. Volatility scares me, but I fear that most governments, including our 7 sages from Bern, are downplaying the threat and are listening too much to the entrepreneurs and less to the real experts. Sometimes it is far better to stop 80% of the activities for 2 months rather than boasting that Switzerland is still running at a 70% capacity, because without taking a bold action this situation of uncertainty might last for a very long time and create a much important damage. Reality, of course, also needs to be taken into account, for sooner or later recovery, and lots of opportunities for all, will arrive.
Our vision is therefore as follows: begin slow investments, but keep an eye open for future deterioration. Don’t expect that the first positive signs we will mean that we are out of the woods. As much as we had a 10 year sustained period of growth during the Obama and first term of the Trump administration, the possibility of a prolonged bear market is very real. The difficulty will be that of surfing the waves and taking advantage of the inevitable rebounds. Hard times ahead captain! Only the braves, to quote the first mantra , takes a whole different meaning.
