The Covid-19 stock market crash came fast with Wall Street’s abrupt awareness that coronavirus would not stay under control outside of China. The stock market downturn started on Feb. 25, when caseloads were mounting in South Korea and Italy. The top Centers for Disease Control official warned the Americans that this might be a terrible turn of events.
Just two weeks, 2,207 U.S. coronavirus outbreaks, 48 deaths, and more than 6,000 Dow Jones points later, we’ve just begun to be aware of how terrible this is going to be. Nonetheless, there have also been promising signs in recent weeks that an effective public health approach might contain the epidemic. New coronavirus outbreaks in China have slowed down, and infections in South Korea have also decreased.
What is ahead of us? Investors will brace for each of the three possible coronavirus outbreak scenarios. The theoretical conclusions described below are based on analyzes by three forecasters. UBS and McKinsey laid out a variety of ways in which the Covid-19 situation could be carried out this week, following Morgan Stanley a week ago.
The trajectory of the coronavirus stock market correction — now the bear market — and the economic consequences depend on how quickly countries will easily return to something that is resembling normalcy. Recent advances have reduced the chances of the most favorable situation.
China’s Coronavirus System Rebuild
Three coronavirus scenarios are based on one main question: can governments in the US, Europe and elsewhere slow down and halt the Covid-19 epidemic without halting the system?
China’s treatment of its crisis shows that even though the virus infects relatively few people, it can make a significant economic impact, UBS economists wrote in a March 11 article, Pandemic Scenarios for Global Markets: How Bad Could It Get?
Just 0.0056 percent of the population is known to be contaminated, wrote UBS, adding that the magnitude of its containment efforts will, according to their estimation, take 15 percentage points off its Q1 growth rate.
Official figures may understate the scale of China’s coronavirus outbreak. Today, the Chinese government claims to have accomplished coronavirus control by enforcing quarantine and travel controls on an unparalleled scale. Schools and industries went on break. Tourism has screeched to a stop. Auto sales fell by 80 percent, when non-essential demand froze. Mainly, Beijing has shut down and rebooted the economy, transforming 6.4% growth into an unprecedented 8.5% contraction.
China’s factories and stores are gradually opening up, but production remains well below average.
Meanwhile, South Korea has significantly reduced the rate of new coronavirus infections without China-style draconian measures, mainly due to massive monitoring. But even there, schools remain closed, and often residents wear masks to slow down the outbreak. South Korea announced a mini-spike in new coronavirus cases a couple of days ago, so improvement is still in its infancy.
Is President Trump’s Europe Travel Ban Just A Start?
The direction of the correction of the coronavirus stock market and the global economy depends, to a large degree, on one big question. Is it possible for the US, along with most of Europe and Asia, to stop the Covid-19 wave without resorting to China’s dramatic measures?
This issue helps understand why President Donald Trump’s ban on travel from Europe has sunk the stock market crash into new depths. Another suggestion was that the U.S. is increasingly intensifying its commitment to suppressing the Covid-19 virus at the detriment of economic growth.
Coronavirus-related news has been serious.
The National Basketball Association, the National Hockey League and the Major League Soccer have postponed seasons indefinitely. Major League Baseball is going to delay the coming season. The Professional Golf Association called the Master’s off. Disneyland is going to shut down. The curtain has been down on Broadway shows for a while. Many colleges have been on an early spring break this week, while several states are shutting down schools. On Tuesday, New York sent the National Guard to establish a containment area surrounding New Rochelle, a neighborhood of New York City.
These are just the starting steps. What occurs in the coming weeks is going to depend on whether the American health system and others can battle off the coronavirus attack. There’s legitimate reason to talk about it.
The rapid collapse of the Italian health system into instability has prompted the government to extend the ban on travel and public meetings throughout the country. Fiat Chrysler (FCAU) has shut down its Italian factories. Now all stores, except grocery stores and pharmacies have to lock their doors.
What might happen now?
Coronavirus Stock Market Correction Scenario One: Reflexive Reaction
The best-case scenario is that a reflexive solution is workable in the U.S., all of Europe and elsewhere. In this case, the actions should be appropriately modified to delay the spread of coronavirus.
Some hot spots with coronavirus will need widespread closing when it comes to schools and public gatherings, as in Seattle. But lifestyle changes — such as more networking and more at-home care for at-risk seniors — will slow the incidence of coronavirus infection and keep the health system above water.
This is essential to the “Fast Recovery” scenario for McKinsey. Young people are influenced enough to change some of their everyday habits (for example, they wash their hands more often) but not so often that they turn to safety and take actions that come at a higher cost, like having kids home from school.
A positive reflexive response is also implied in Morgan Stanley’s “Fast Containment” example. Assuming minimal volatility in the first quarter, the S&P 500 could come back to 3,250 this year, the company says.
The UBS economics team’s best-case scenario sees a small degree of increased dysfunction, as coronavirus cases outside of China recover within 4-6 weeks. In recent days, the pace of new Covid-19 cases in the U.S., Europe and the rest of the world has increased, surpassing the average in the worst days of China.
Time is slipping. Throughout the States, still-limited coronavirus testinghas found it impossible to find and close new Covid-19 clusters. For a while, the lack of known cases has given a false sense of security. The uncertain magnitude of the Covid-19 epidemic is sparking fear.
But, if new coronavirus outbreaks in the U.S. and Europe stabilize in the coming weeks, monetary and fiscal support could carry global equities to new heights this year, UBS economists wrote. Wall Street seemed to be leaning toward this desirable situation earlier this week. Then came Wednesday’s sharp sell-off and Thursday’s thrashing after Trump’s European Union travel directive.
The stock market rose sharply on Friday, helped by a late scramble as President Trump announced a national emergency over the coronavirus. He declared additional assistance, expanded coronavirus monitoring and red-tape relief to try to suppress the Covid-19 virus while shoring up the economy.
Nonetheless, for the week, the main indices fell sharply. Seeing the coronavirus stock market downturn becoming a full-blown bears market, creditors have started to fix rates in a more pessimistic forecast.
Coronavirus Stock Market Correction Scenario Two: Restricted Reaction
The second, more severe scenario, is a rolling wave of outbreaks of coronavirus infection that threaten local and national health services in the U.S., Europe and other places. Governments are taking more deliberate steps to implement social distancing. There is a sharp downturn in economic activity, continuing into the second quarter.
This coronavirus forecast approximately matches McKinsey’s “Global Slowdown scenario established with Oxford Economics. It estimates that the U.S. caseload is between 10,000 and half a million.
In Europe and the United States, transmission is high but remains localized, partly because individuals, firms and governments are taking strong counter-actions (including school closures and cancellation of public events)
McKinsey expects the global economy to face a recession under this coronavirus scenario and recover in the second half. Yet annual global economic growth is halved to a range of 1%-1.5%. U.S. inflation sinked to less than 1% for the year, while China’s GDP growth remains below 4%.
Similarly, Morgan Stanley’s extended-disruption forecast saw U.S. economic growth slow in Q2 before a second-half rebound. The S&P 500 earnings will see an additional year of roughly 0 per cent rise.
This situation gradually seems like the most likely, according to Morgan Stanley Chief Investment Officer Mike Wilson and his forecast at the beginning of March.
Given the economic implications, the company’s stock market forecast is not that grim. Wilson sees the stock market stay in more of a trap between a bear case and a more bullish situation, but is primed to rebound as optimism rises that the tide has turned.
The intermediate outlook presented by UBS looks bleak, since they expect the outbreaks will escalate by a factor of 1,000, which may mean more than 100 million coronavirus cases across the world and 1 million coronavirus cases in the U.S. If the coronavirus epidemic is under control by mid-year, UBS sees the U.S., Europe and Japan going into recession and eventually beginning to overdrive by Q4. As long as China does not have a coronavirus outbreak, the global economy will see a rapid rebound.
Global equities could dip 25 percent from their highs, UBS reports, before recovering to close down 3 percent this year.
Preceding the Friday rebound, the Dow Jones, S&P 500 and Nasdaq composites had all dropped more than 25% from their all-time highs.
One risk for rebound will be an insufficient fiscal response. An increase in coronavirus-hit sectors could hurt business expectations, leading to a more drawn-out economic and stock market recovery. And while politics has faded as a problem in recent days, it may return once the coronavirus has abated and the election day approaches.
Coronavirus Stock Market Correction Scenario Three: Relentless Reaction
The third scenario is the most worrying.
The hope is that the heat and humidity will disrupt coronavirus transmission by late spring, much like the flu. Even if it doesn’t, overburdened hospital services around the world won’t get any reprieve. Elsewhere, is China going to suffer a new wave as it ramps up economic activity?
If China’s heightened state of readiness and behavioral change can not hold the coronavirus at bay, governments around the world will have to stay on a coronavirus war footing. Beijing makes foreign visitors self-isolate for two weeks on arrival. Ten tourists, including one American, have checked positive, China reported on Wednesday.
If the economy doesn’t catch a break on China and the seasonal fronts, McKinsey sees a prolonged Covid-19 pandemic and a global recession.
Morgan Stanley’s prolonged Covid-19 scenario involves a shallow US contraction and multiple quarters of negative earnings growth. Although the S&P 500 could close the year at 2,750, downside overshoots during peak panic times are likely.
The S&P 500 closed on Friday at 2.711.02, following a 14-month low of 2.478.66 on Thursday.
In its pandemic scenario, UBS envisages an outbreak equivalent to that of the H1N1 swine flu, about 1 billion. Worse still, coronavirus has a much higher mortality risk than the H1N1 sub-0.1 percent average.
Still, hopes for a coronavirus vaccine in 2021 and the availability of successful drugs can deter all-out hysteria. In this situation, UBS saw an potential 20% downside for global equities in the coronavirus stock market reversal. This would mean that the Dow Jones, S&P 500 and Nasdaq would lose about one-third of their peak value. Good fiscal assistance will be much more important in the face of the economic crisis.
Covid-19 Pandemic Vs. the H1N1 Swine Flu Pandemic
How does the Covid-19 pandemic align with the most recent pandemic announced by the World Health Organization? The CDC reports that more than 60 million Americans had contracted the H1N1 virus in the first year through April 2010. Of those, 274,000 were put in hospitals and about 12,500 died.
Researchers conclude the coronavirus spreads much more quickly than swine flu. The typical person with coronavirus is likely to infect at least two, and maybe even three others, reports show. Most of the reports placed the figure of swine flu at two or fewer.
German Chancellor Angela Merkel said this week that 60-70 per cent of Germany’s population is likely to get coronavirus. The argument, obviously, was that Germany needed to take action to stop the result, as it would be impossible to contain.
Here’s why: Less than 0.5% of those affected received hospitalization during the swine flu outbreak. However, public health experts have predicted that 15% or more of people diagnosed with coronavirus will require intensive treatment. Up to 5% of all Covid-19 infections have complications involving intensive care units. With only about 300,000 available hospital beds in the U.S. at any given time, they may be packed with approximately 2 million coronavirus infections.
U.S. Recession Risk: 50%-60%
Tony Roth, chief investment officer at Wilmington Trust believes that the U.S. appears to be on a course where the healthcare network may well be overrun. The total number of cases is potentially a large multiple of 1,000, but with extremely limited coronavirus tests we have no precise number.
He additionally believes that elevated levels of obesity, heart disease and cancer in the U.S . are root factors that tend to lead to bad coronavirus outcomes for patients — and will put more burden on the health care system and possibly raise the incidence of coronavirus fatality.
When ICUs fill up, more people with coronavirus will die. Overworked, virus-inundated health care workers are now at greater risk. These factors help explain Italy’s high rate of coronavirus mortality, particularly compared to South Korea. Italy’s relatively elderly demographic is also growing its vulnerability.
Flattening the trajectory in new coronavirus diseases to avert health system emergencies would result in a cascade in limitations on economic and social life, Roth expects. While he does not anticipate something similar to initiatives in China or Italy, the U.S. still faces a demand-side shock from people isolated to escape coronavirus.
Calculate in the big body blow to the oil sector from dropping prices and it contributes to the recession, Roth notes. But it’s a close call.
If the coronavirus does not appear to be seasonal, the economic toll will be greater, he says. But the future will still be optimistic a year from now, with steps towards a coronavirus vaccine and successful viral therapy.
Surviving The Coronavirus Stock Market Correction
What will investors do after the Coronavirus stock market correction? The best course of action is to be in the money. Investors were forced to shift to the sidelines after IBD moved the market course to the recession market on February 25. And leading stocks are crashing in the downturn of the stock market and, in particular, the bear market.
But remain engaged, however. Follow the pattern of the market. Look for a follow-through day to validate a new stock market rally. A follow-through day takes place a few days after a rally attempt with a strong price increase on one or more of the main indices in higher volumes than the previous session.
Not every follow-through day succeeds, particularly in the bear market, and investors don’t need to jump in. But they need to be trained for this.
Develop stock watchlists for those hat are fairing well now. Look for stocks with strong fundamentals that sport rising relative strengths, reflecting their success against the S&P 500 index. Such large RS stocks are likely to lead the next stock market rally whenever that happens.
As for 401(k)s and other retirement accounts, this is a judgment call. Maintaining capital is more critical for those in or near retirement. Older Americans may want to switch at least some of their retirement savings to cash. For investors with a longer time span, they may opt to remain on track. However, if the coronavirus epidemic forces the US into a deep or prolonged recession, investors may agree to step aside at least marginally.