Bassanese Bites: Peak infection – April 14 2020

Global Markets

The S&P 500 rebounded a lazy 12% last week as Wall Street again easily managed to look past weak economic data and focus instead on yet more Fed support programs and further progress on “curve flattening”. Markets remain hopeful that as US infection rates ease, the US can eventually lift social distancing restrictions and the economy can therefore enjoy the much hoped for “V-shaped” recovery. Indeed, last week the Fed conveniently timed its latest support announcement (purchases of local government debt and underwriting of bank loans to embattled small businesses) to coincide with another shocking weekly jobless claims report – and sure enough, the market focused on the former!

Of course, we should not forget that strong rallies – such as we’ve seen in recent weeks – are typical in bear markets and the sharper the initial decline, the faster is often the first bounce.  That said, compared to the GFC, it should be said what is supportive of markets this time around is that 1) stimulus is stronger and more timely, as given this recession is “undeserved” there’s less push back against bailouts and moral hazard and 2) the leading US sector this time around – technology – is less negatively affected by lockdowns than others.  Against this, we’re still facing the worst US recession since the Great Depression.

Whether the rally last remains to be seen, I still suspect we’re due for at least one decent re-test of previous lows at some stage.  For starters, even if the US moves past peak infections, it will still face months of lingering restrictions (given a vaccine and better treatments are still months away) and the ever-present risk that they could be re-imposed in a heartbeat if a second wave emerges.  This is hardly a recipe for a V-shaped recovery in business and consumer spending.

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