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We've Never Seen Numbers Like This - How Will It Play Out In The End?

A chart of the S&P500 by the ActivTrader Platform.

A chart of the S&P500 by the ActivTrader Platform.

ACTIVTRADES WEEKLY

By Ricardo Evangelista

www.activtrades.bs

The coronavirus pandemic is taking the planet by storm, despite emerging less than four months ago it has taken over headlines, infecting hundreds of thousands including prominent leaders such as the British Prime Minister Boris Johnson and causing unparalleled economic and social havoc.

Authorities around the globe are taking draconian steps to halt the progression of the pandemic, with measures that are having an enormous impact. Entire countries have been placed under lockdown, as is the case of The Bahamas with the emergency powers order published on March 24 restricting business and socialising down to the bare essentials.

As necessary and unavoidable as such measures are, they are also placing an historically unprecedented strain on the world’s economy.

Goldman Sachs recently published a research piece predicting a contraction of the American economy of almost 25 percent during the second quarter of the year. Truly unparalleled numbers which will echo in many other countries as COVID-19 continues to spread and claim an increasing number of victims, overwhelming health care systems.

Despite moves of concerted action from governments and central banks, such as the federal aid pack of $2tn in the United States which followed the move by the Federal Reserve to cut rates by one percent, the economic prospects for 2020 are still bleak. On the week ended March 21, 3.3 million Americans filed for unemployment benefits; this is by far the highest ever number, dwarfing the previous maximums of 695,000 in October 1982 and 665,000 in March 2009.

To many of us the word recession resonates with the 2008 financial crisis or the 1929 great depression, but what we are entering now could be even more serious because of the scale and speed at which global economies are shrinking, as all but essential economic activity is brought to a standstill.

During the 2008 and 1929 crises, stock markets dropped more than 50 percent, credit dried up and there were bankruptcies generating high levels of unemployment. However, it took three years for the events to unfold. The coronavirus generated a similar scenario within only three weeks. It took only 15 days for the S&P 500 to drop more than 20 percent from its all time high, bringing the longest running bull market in history to an end. At some point in mid-March the losses exceeded 35 percent and despite a recent recovery - seen by some as a “dead cat bounce” - the S&P500 is still more than 20 percent below where it sat mid-February.

And how will this crisis continue to unfold? The best-case scenario points at an economic downturn more severe than the 2008 recession, but shorter-lived. For this to happen, the economic activity will need to return to a semblance of normality by the third quarter of the year, entailing that China, Europe and America will be able to contain the spreading of the disease.

Such a scenario will also require politicians to continue delivering support to businesses and workers, as well as more easing and accommodation from central banks, that have already done in three weeks what took them three years to achieve during the last financial crisis.

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