Economic Recovery: Short- and Long-term Scenarios to Consider
The coronavirus has stifled global economic activity in a remarkably short period of time. In contrast to downturns of the recent past, where misallocated capital or asset bubbles were to blame, the current crisis is unique in that it pits man against pathogen in a global pandemic where the best defense for now—social distancing—is the very thing inhibiting a larger scale economic recovery. Adding to this uncertainty is the fact that there is no credible timeline for when the virus will be contained or eradicated.
Despite such novel challenges, we doubt the world has entered a new paradigm. To keep the financial system working, we’ve seen approximately $10 trillion of global fiscal and monetary stimulus in just one month—an unprecedented level of support for capital markets. Social distancing appears to be working. In China, many schools, public venues, and businesses have reopened.
Even Wuhan, the epicenter of the pandemic, has lifted its 11-week lockdown, allowing residents to come and go without dispensation. Credit markets, all but frozen a few weeks ago, are functioning again. We take these signs as a reinforcement of a fact that has always been true—financial markets eventually recover. As such, our attention has largely turned to helping investors answer questions of how they want to participate in that recovery.
Where Do We Go From Here?
No one knows the timing of the global market bottom. We expect volatility to persist, and perhaps even intensify, until the full impacts of the coronavirus are clarified. In order to help investors prepare for what’s ahead, we’re sharing a fundamentals-based framework for thinking about potential recovery across global investment strategies.
Investment Considerations
Key Indicators to Watch Along the Way.
- The effectiveness of fiscal and monetary policy in providing liquidity and stemming the economic downturn.
- The point at which new COVID-19 cases plateau and start to decline could signal an inflection point for the global pandemic as well as global capital markets.
- Downward DXY index movements, as U.S. dollar demand tends to rise during periods of crisis and fall during periods of global economic recovery.
- Downward VIX index movements, as downward migration would suggest a movement toward calmer markets and investor sentiment.
- A healthy commercial paper market is supportive of broader capital market activity.
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