What next after the fastest market crash in history?
Equity markets lost 33% from the 19 February peak to the 23 March trough – just 23 trading days and since then, markets have bounced back by +22%. Movements of this velocity have never been seen. Therefore, March 2020 marked the fastest financial market crash in history.
In addition to global equities, no risk asset was spared in this crisis. Across the board, risk assets were hit; corporate bonds, high yield, convertibles, collateralized loan obligation (CLOs), gold, oil and commodities, bitcoin and private equity listed vehicles. These wild market swings remind us there is no such thing in investments as a risk-free asset.
The speed of destruction has not just been to the markets. The restriction measures most governments imposed to manage the sanitary and medical situation resulting from the COVID-19 pandemic have very rapidly disrupted national economies, to a degree and with a velocity never seen in history and will have lasting impacts.
Seismic impact
Goldman Sachs data shows US GDP would decrease by 40% over the first half of 2020. Across the globe, industries have been put into immediate pause, with instantaneous impact on revenues, leading to people losing their jobs and supply chain disruptions.
Indebted companies in certain sectors are already facing critical situations, despite announced government relief. Adding to the uncertain economic outlook has been a brutal oil price shock – now at a 21-year low. The debt situation of many US shale companies has now become critical. Nevertheless, it should be noted the banking system is in good shape, especially compared to the financial crisis of 2008.
The rebound in the economy is currently expected to be quick and strong, with US GDP expected to return to 2019 levels in just six quarters. As opposed to the last financial crisis, financial markets and participants are not blamed for what happened. There are no bad actors in this recession, other than the virus – and policy makers are in ‘do whatever it takes’ mode.
Supportive winds
A more robust rebound would require progressive lifting of the restriction measures between June and September. At an economic level, global interest rates staying at zero is supportive and, crucially, we must see the efficient transmission of government support measures to corporations and individuals.
The oil price being ~50% lower is equivalent to +1% in consumer spending power. Further boosting domestic economies will be corporate and private fiscal stimulus measures. Very sizeable infrastructure plans are starting to be announced and this should help developed economies regain ground.
That said, it is still impossible to determine if financial markets will come out of this in a V-shape, U- shape, W-shape recovery, or if we will plunge into an L-shape situation. Prior to the coronavirus shock, developed economies were already experiencing the ‘Japanification’ effect of slower growth and low inflation – the impact of an incapacitated global economy is likely to intensify this process. Only time will tell how long it might last.
The risks ahead lie in the credit market, even in sovereign bonds, with significant additional borrowing at country levels. Corporations will experience numerous bond rating downgrades, which may lead to another leg of bond selling in Q2 and Q3. Equity markets will see less stock buybacks and a decrease in dividends, providing less market support and higher volatility at the individual stock level.
Banque SYZ is an Authorised Financial Services Provider. FSP number 46429
