Will There Be Another Leg Down?

FYI | Apr 21 2020

By Peter Switzer, Switzer Report

Will I be damned if I do or damned if I dont? These are the big questions we all have to face in working out if we start loading up on stocks for tomorrow or do we wait for another leg down?

I dont know the answer but its my job to have an informed opinion on the subject. Ive never had to do the numbers on a virus, its infection and death rates and the likelihood of it coming again in a second wave. And would a plethora of treatment processes do the trick or do we really have to wait for a miracle vaccine?

Overlaying all these basic questions is: how will social restrictions ease in and will they bring earlier-than-expected stimulus to the economy? Or will they backfire, forcing the re-instigation of tough lockdown regulations?

As countries around the world from Austria to Denmark to Germany start easing restrictions (even the Kiwis set their sights on less lockdowns), we have the biggest test for a surprisingly optimistic stock market the US being opened for business soon!

More on this make-or-break decision for the stock market later.

In its morning briefing note, NAB explained why the US stock market continued to rally on Friday:

Optimism continued on Friday with talk of further containment rollback, while leaked results of successful trials of Gileads Remdesivir and Roche looking to release antibody testing kits also helped, it explained. Chinas industrial production for March also added to views that a strong bounce back could be likely, following the lifting of containment measures production +32.1% m/m after falling -24.9% in February.

On back of the envelope calculations, the S&P 500 has rebounded 28% after a 34% slump, which means overall the Coronavirus and its containment policies have cost US investors only 15%!

In contrast, our S&P/ASX 200 has lost 23%, despite our infection and death rates being miles better than the Yanks.

Obviously, being heavily dependent on bank stocks, our stock market index has been hurt and these organisations have been asked to shoulder a big part of the rescue programme. Also, lower rates of interest and an economy in recession is bad for banks and the edict to reduce dividends from the regulator hasnt helped.

Also, the Government decision to let super members access up to $20,000 worth of super has put pressure on super funds to liquify assets and that has to mean selling shares. Todays AFR says Hostplus is seeking to take out $1.5 billion from one of the countrys biggest property investment funds ahead of what could be an avalanche of requests by out-of-work hospitality and tourism workers for early access to their retirement savings.

That said, we have rebounded 20% after a 33% fall, showing that the uncertainty of the initial Coronavirus sell off has been partly addressed by the huge local stimulus package and the combined muscle of the RBA and the supporting banks that are giving six-month loan deferrals. An estimated $339,485 million or around 17% of GDP has been pledged by Australian governments to help the country deal with the virus crisis, which is huge by international standards.

But as Ive already suggested, the missing pieces in the should I invest puzzle are all health related:

  • Will virus data expedite the easing of restrictions and lockdowns?
  • Will a second wave force us back to lockdowns and closures again?
  • Will a treatment help us get back to normal?
  • Will a vaccine be essential for normalcy in the economy?

These arent easy questions to answer by medical experts, let alone economist/markets commentators who often rely on history and trends to guess the future. And the history of stocks during the Spanish Flu is intriguing.

Dow Jones Industrial Average (1915-1922)

Source: Macrotrends.net

Note how the Dow rose in the flu years of 1918 and 1919 but was bear-like in 1920 before roaring back in 1921 and into a decade called the Roaring 20s.

Morgans chief economist, Michael Knox thinks we could be facing a rerun of the Roaring 20s this century. And look at how the Aussie stock market performed over the period.

Source: MacrotreOur

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