Equites seem to be recovering. The broader market is up almost 6 percent over the past two days. The question in everybody’s mind is: Will this trend continue? The answer looks very unclear. The Coronavirus data from New York looks positive. The rate of infection and number of hospitalizations look to be declining. While this news is encouraging, this progress requires a herculean effort which cannot be diminished if progress is to continue. This premise means that it will take a significant amount of time before the economy resumes as normal.
In Wuhan, China, where the outbreak began, the last protective measures were lifted today. The restrictions began on January 23 and continued for two months. The most optimistic timeline in the United States would be the Wuhan timeline. With America’s quarantine largely beginning on March 14, it can be reasonably assumed that these restrictions will last until May 14. However, this scenario is optimistic. To achieve such a short timeline from outbreak to recovery, China had to implement severe restrictions. In a liberal democracy like America, these restrictions are simply untenable. So what does this mean? It means that the timeline America can expect will be substantially longer, probably one to two months more than Wuhan. This extended period of social distancing will mean an additional 8 to 10 percent drop in GDP ( Gross Domestic Product). However, equity prices do not move in tandem with GDP.
So is now a good time to buy? The equity markets are pricing in a quick turnaround in consumer sentiment, which seems unlikely to materialize until a vaccine is widely deployed. People have been attacked at a visceral level. Such emotions cannot be easily overridden without an antidote to the Coronavirus. The market will probably drop 10 – 15 percent over the next month, by which time it will be clear how fast the recovery will be. The speed at which the economy returns will dictate how the economy will weather over the next few years.
The investor, who cares only for the long term, should be considered about which tools are still available in the wake of a second recession. Both the Federal Reserve and Congress have exhausted all their stimulus measures. Without ample time to reload on these stimulus measures, there is a high risk of a severe economic downturn without the cushion of stimulus. The rising corporate debt load is a bomb waiting to explode. This Coronavirus has only added to the corporate debt burden and worsened the future explosion. Companies that survive this crisis may not have much time before the next. While the Coronavirus pandemic may be the primary concern for the markets do not forget about these high corporate debt loads. They will come back to bite and they will hurt equities for a long time.