Feeling sick | BetaShares

Feeling sick

BY David Bassanese | 16 March 2020
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Global Markets

Last week was one to tell your grandchildren about. And for the younger people around the market, you’ve now been blooded with an example of just how volatile and cruel the equity market can be.  Each generation gets its own meltdown it seems and and now it’s the millennials turn.  It’s why equities outperform cash and bonds over the long-run – you are getting paid to endure the often wild ride!

But this is one for the record books – we’ve now had the fastest descent into a US bear market (20% decline from peak) in history, with the S&P 500 down 26.7% within 18 trading days at its low point last Thursday.  We’ve also seen broader liquidation and deleveraging develop, with  yields on even government bonds rising last week. Credit spreads have naturally widened also, with a move to cash also hurting gold.   My long held view that the $A would hit US 62c this year has been realised, albeit not for the reasons I expected.  My long held call of the RBA cutting the cash rate to 0.25% is next – and it could be as early as this week.  Why wait?

Signs of escalating coronavirus numbers in Europe and the US clearly unnerved investors last week.  Continued dithering over US fiscal stimulus, Trump’s surprise decision to ban European travel, and suspension of America’s basketball season also did not help.  As I write, the Fed has just announced a 1% cut to the Fed funds rate – ahead of its scheduled meeting on Wednesday – taking it back to a range of 0-0.25%.  Anticipation of such a move this week likely helps explain the US market’s huge rebound last Friday, and ironically the Fed’s early move has now denied the market any chance of a further (bear market) rally leading up to its appointed meeting on Wednesday.

While there’s some economic data in the US this week (retail sales and industrial production for February), most of this preceded the coronavirus outbreak so it not that relevant.  Otherwise, markets are now left to focus on a likely further rise in US coronavirus cases, further shutdowns in US economic activity and what, if anything, Washington can agree to in terms of fiscal stimulus.

Sadly, it seems only bad news awaits, and it will be interesting to see when and if selling exhaustion develops – once the market can no longer sell off on bad news, it’s usually a good signs we’re near a market bottom.  But I won’t hold my breath.  Just as this has been the fastest move into a US bear market in history, it could also prove to be the shortest.  But just for the record, the previous shortest bear markets have been around three months, and during US recessions – which now seems likely – the average market decline is around 35%.  The last two bear markets had declines of around 50%.

Australian Market

Both the NAB and Westpac respective measures of business and consumer confidence weakened last week as expected, though on a brighter note the Federal Government announced a clever fiscal package designed to reduce the chances of a negative June quarter GDP outcome.  Whether it’s enough to stave off a “technical” recession (i.e. two successive quarters of negative GDP growth) remains to be seen, but the economic road ahead will be challenging for at least several more weeks.  One specific concern regarding Australia is that we’re moving into the cooler “flu’ season, whereas at least in the US conditions should start to get warmer – which may limit the coronavirus outbreak to a relatively greater degree.

As in the US, we get some local data this week – February employment on Thursday – but which is now all but irrelevant given coronavirus concerns. Batten down the hatches, the bumpy ride is not over.

(Try) to have a great week!

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4 Comments

  1. Kieran Doyle  |  March 16, 2020

    Dear David,

    The available research I have read indicates there is very little evidence to assume this particular strain of corona virus will lessen during warmer weather so the assertion that in the US the coronavirus may lessen is speculative at best. We may hold it behaves like the common influenza strains but this is really unknown. I suspect, given the poor and chaotic states of US health system we can be far more confident in asserting it will get very very bad in the US even if warmer weather has some effect. Batten down the hatches is very much on the money.

  2. Dustin Adams  |  March 16, 2020

    Thanks David,

    Always a pleasure to read, even if the news is bad.

    Thanks

  3. Danny Rischin  |  March 18, 2020

    Dear David
    Thanks for your missives. Always good to read.
    My question to you is this. The world went through a devastating recession in the early part of last century with businesses ,banks, and economies collapsing. This lead to massive unemployment and incredible social upheaval, following the end of WW1 and not too many years before the onset of WW2. I’m not suggesting anything like this will eventuate, but what is your opinion of the likelihood of a similar global recession and it’s inevitable impact on life in Australia, now that we have a pandemic on our hands.
    Thanks

    1. Benjamin Smith  |  March 20, 2020

      Hi Danny,

      If a vaccine is not developed and ready within 6 months there is a very real risk of a deep and extended global recession for a year or more as the virus effectively requires repeated “lock downs” of economies so as to not overwhelm medical services. Locking down economies is more than recessionary but rather depressionary, so I can’t discount this risk. That said there appear to be very good prospects for a vaccine suggesting we may only required one lock down for a month or so. That will still lead to a deep but likely short global recession.

      The 1930s depression was worse than it needed to be due to poor macro policies. For example, the lack of monetary or fiscal stimulus when required.

      Kind regards,
      David Bassanese

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