Traders work on the floor of the New York Stock Exchange on March 4. US and global equities are currently down by less than 20 per cent from their all-time highs. Photo: EPA-EFE
by Patrik Schowitz
by Patrik Schowitz

As the coronavirus batters economies worldwide, what accounts for the truncated US bear market?

  • Despite terrible economic data and a collapse of business confidence indicators worldwide, stock markets have rapidly rebounded from their lows
  • Investors seem to be weighing the market’s long-term prospects, based on stimulus measures, rather than voting on short-term risk

Despite being rocked by the economic shock of Covid-19 containment measures, global equity markets and corporate credit have set speed records in their rapid rebound.

Looking at US data back to the mid-1800s, even the shortest equity bear markets (defined as declines of more than 20 per cent) have taken around three months to find a bottom. This year, the US equity market seemed to bottom much faster. It dropped by around a third in just 4½ weeks from mid-February and has since then regained nearly a quarter.

Overall this leaves US (and global) equities down by less than 20 per cent from their all-time highs. Is this sustainable or is it a false dawn?

Markets have seemingly ignored a litany of horrible economic data which leaves little doubt that the world economy is in a deep recession: in the US, roughly 10 per cent of the workforce have already filed for unemployment in just the last three weeks, and the unemployment rate looks like it’s headed for the mid-teens quickly from less than 4 per cent just a month ago. Across the world, indicators of business confidence have collapsed.

How should we think about this disparity between resurgent markets and the miserable real-world impact? Many argue that markets are too optimistic and will need to revisit and maybe surpass previous lows. That is certainly possible, but markets are fundamentally forward-looking in their nature.

As Berkshire Hathaway CEO Warren Buffett, citing the father of value investing Benjamin Graham, put it: “Markets are voting machines in the short term, and weighing machines in the long term.” We may now be moving from a phase of shock, in which investors have voted with their feet by rapidly selling risky investments, to a phase in which investors are trying to weigh up what the future of the economy will look like.

Fast, huge and often concerted efforts by both monetary and fiscal policymakers seem to have convinced investors that economic worst-case scenarios have been averted. These would have seen the initial economic hit spiral into a wave of business failures and financial market accidents and deeper recession.

China Covid-19 stimulus ‘10 times more efficient’ than US Fed: official

However, central banks have loosened policy aggressively and implemented a plethora of measures to repair money markets that were showing clear signs of breaking down – and it looks like they are succeeding.

For their part, governments have ramped up fiscal commitments to support the real economy. These are easiest thought of in two pieces: one, traditional fiscal stimulus to get the economy going again and two, assistance to businesses and households to replace lost income and avert widespread bankruptcies that would impair economies’ capacity to recover. Even so, any lifting of behavioural restrictions once virus infections peak will be gradual and damage to confidence and supply chains will linger.
Employees work at an assembly plant of FAW-Volkswagen Automobile in Chengdu in southwest China’s Sichuan province, on February 19. The Covid-19 pandemic has shaken global supply chains. Photo: Xinhua
In this context, emerging Asia, dominated by China, is a little out of step with the rest of the world. China fell victim to the virus earlier than the rest of the world, but also controlled it earlier and is already trying to get its economy back to normal, even though so far it has applied less economic stimulus than the US or Europe. Its asset markets have also been somewhat less affected, although they had already been damaged by the trade war last year.

Outside China, trends across the region vary considerably, but taken as a whole this highly export-oriented region should struggle to escape the wider global economic currents.

We are likely to see a fairly rapid initial global growth spurt as restrictions on some social and business activities are lifted over the next few months, but the economy is likely to remain considerably short of its previous level of activity even by year-end.

Women work at a garment factory in Hanoi in May 2019. Asia’s export-oriented economies will struggle to get back on track in the aftermath of the Covid-19 pandemic. Photo: AFP

This should be followed by a much slower and more uncertain growth path to regain pre-crisis economic levels, which may well take several years. Evaluated against this picture of the future, the recovery in markets from the panic levels in March does not seem irrational.

It clearly is still at risk of disappointment should there be a big second round of virus infections around the globe or if the corporate profit reporting season that is getting under way reveals some major negative surprises.

Absent these, however, it now seems increasingly possible that risky assets markets already saw their lows in March. Still, we should not expect the recent pace of the price rally to continue. With panic having receded, the going in markets will get tougher from here. They will eventually regain their highs, but, just as with economies, it will take time, possibly years.

Patrik Schowitz is a global multi-asset strategist at JP Morgan Asset Management

This article appeared in the South China Morning Post print edition as: Markets rising but return to past highs will be work of years