Until a vaccine is found, Covid-19 will continue to maul the economy – whatever markets believe
- Investors are right to draw comfort from the massive stimulus injected to prevent a crash, but they should not dismiss the extent of the disease’s impact on the global economy
For an indication of the extent to which financial markets were overly optimistic about the economic damage caused by the Covid-19 pandemic, look no further than the findings of Bank of America Merrill Lynch’s April global fund manager survey.
Over the past several weeks, expectations of a V-shaped recovery – a steep downturn, followed by a sharp rebound – have given way to much gloomier forecasts. According to the survey, 52 per cent of respondents now believe the recovery will be a weak U-shaped one, while 22 per cent expect a short-lived W-shaped upturn.
In a sign of the anxiety over countries’ ability to contain the spread of the virus, the biggest “tail risk” in markets is a second wave of infections, the survey notes. The threat of a systemic financial crisis, on the other hand, is perceived as much less significant.
The relief that a 2008-style meltdown has been averted is most apparent in stock markets. The benchmark S&P 500 index has surged 31 per cent since March 23, erasing more than half its decline since its peak in mid-February and propelling the index into a new bull market.