April 8, 2020
Global equity markets have rallied strongly from late March lows, with the MSCI global equity index (ACWI) only narrowly in bear market territory today. This move represents significant upward progress from the peak-to-trough decline of nearly 34% and has led many investors to question whether the worst may be behind us. While progress has undoubtedly been made on containing the global outbreak of COVID-19 – and addressing the economic consequences of these containment measures – it is important for investors to recognize that quite a few unknowns related to recovery remain and will likely lead to more volatility ahead.
Market bottoms are best viewed in the rearview mirror, and although we have bounced nicely from March lows, it may be too early to wave the “all clear” flag. As we have been noting, a sustained market advance will depend on several important factors:
Data that containment measures are successful: We have seen data that reflects a slowdown in the rate of infection and death in China, South Korea, Italy, Spain and other countries. We are looking for the peak in the U.K., U.S. and France to arrive in the next week or two. Overall, data is positive that countries have been successful in flattening the curve. That said, we are also mindful of the spread in vulnerable high-density countries, like India and other emerging economies, and will be watching trends in those regions carefully.
Positive news on the progress of global healthcare initiatives: Investors fear a “Phase 2” of the virus – a recurrence either as containment measures are relaxed, or seasonally in the latter part of 2020. Confidently “getting back to work” will rely on the combination of broader testing, effective anti-viral treatments for those afflicted, tests for those who may have already been infected and could be immune, and ultimately a COVID-19 vaccine. Again, recent news on those fronts is on balance positive, with rapid testing being rolled out more broadly, continued research on anti-viral treatments gaining traction and the CDC beginning to conduct blood testing along with developing rapid serology tests.
More clarity on economic/fundamental damage: As strategists and economists compete for who can have the most dire forecast, investors will look to upcoming data to assess how deeply containment measures have impacted the global economy. Every day we receive more data, and we know more. The “market” does not need the data to get better: It just needs the data to efficiently set prices with confidence and for investors to narrow the set of possible outcomes. This is really an important second phase, and we are gaining clarity on the extent of the damage with each passing day.
Visibility into the efficacy of fiscal/monetary firepower: Investors know that the economic damage will be extreme and understand that these periods of deep supply and demand destruction can turn into economic depressions. That is why the fiscal/monetary bridge is so important. We need to see that the bridges being built are structurally sound. The market provides signals here (e.g., bid-ask spreads and market liquidity measures), and the economic data will as well. We are still in early days, but policymakers around the world clearly remain in “whatever it takes, for as long as it takes” mode; it is likely that open-ended stimulus could provide a floor to asset prices.
Drawing the roadmap to recovery: Ultimately, the roadmap toward reopening the economy will be important to a sustainable market recovery, and we don’t necessarily have to wait for 100% resumption: Investors will need confidence that a reasonable plan is in place. We will look to China, as well as Italy and Spain, as templates. While it is still early, there are some interesting plans being considered, including the U.K.’s “Immunity Passport,” a staged reentry. In all cases, people will need confidence that infection risk has diminished. And this could prove difficult, with testing woefully lagging in most countries and the threat of “false negatives” from current serology testing methods.
An important set of “unknowns” remains, and without clarity it will be difficult for risk sentiment to improve confidently and sustainably.
We believe the economic damage from the crisis in Europe will be severe, that more stimulus is needed, and that ultimately, the Eurozone will take the necessary “whatever it takes approach” to prevent defaults and preserve the long-term viability of the European Union.
The current total fiscal stimulus (both direct and indirect) that has been enacted in Europe to date is estimated to be 4.5%-5% of GDP. While significant, this compares unfavorably to roughly 10% in the U.S. as well as estimates that countries could be losing as much as 3% of GDP for every month of lockdown.
We believe that the Eurozone’s next economic lifeline will be delivered through the European Stability Mechanism (ESM), a financial institution set up by euro area member states to loan money to countries and banks in severe financial distress. We believe the fund will be enlarged and used by the countries that need it, in particular Italy and Spain. At issue, however, are the “strings attached” to the ESM, which were put in place during the Eurozone crisis in the aftermath of the 2008/2009 global financial crisis as a means to bail out Greece. Designed as a bailout of sorts, it came with terms and conditions aimed at repairing and restoring fiscal stability. Italy, in particular, is balking at the terms, noting that this particular crisis was not a function of infrugality. Policymakers will resume talks tomorrow, with the hope of coming to a resolution quickly.
There has also been discussion around the potential issuance of eurobonds or “coronabonds,” but we think this solution is less likely given fierce opposition from Germany and the Netherlands and the difficulty of efficient execution. The debate over issuance has once again illuminated the continued fiscal tension between North and South.
While we may not be getting the entire picture from official data released from China, there is reason for cautious optimism. In terms of official data, the latest reading on manufacturing, as measured by the Purchasing Managers Index, jumped from a record low of 35.7 in February to 52.0 in March (readings above 50 indicate expansion). Likewise, unofficial, less direct economic metrics, such as traffic patterns, pollution and electricity use have rebounded significantly as people return to work.
That said, we will be carefully watching a couple of indicators as we assess China’s recovery phase and its implications for recovery elsewhere. First, we will be closely monitoring whether relaxed social distancing measures lead to an additional wave of infections. As we write, official cases seem to have plateaued around 83,0001, and on Tuesday, China reported its first day since January 20 with no deaths from COVID-19. This data is encouraging, but many worry about the accuracy and sustainability of the trend.
Second, it will be critical to watch consumer behavior in the weeks and months ahead, as psychological scars and job losses may prevent demand from returning to pre-crisis levels. With the announcement this morning of the end of the lockdown of Wuhan, the epicenter of the outbreak in China and home to 11 million people, we will begin to gather important data about the speed of recovery and any lasting impact on consumer behavior.
Importantly, what we have observed thus far in China is a “stutter step” progress: relaxing social distancing measures only to re-impose them as fears of a rebound in the number of infections grew. As we have said consistently, there can be no confident progress without effective handling of the health crisis.
Many thanks to Suzanne Shier, wealth planning practice executive and chief tax strategist, for answers to the following questions.
Yes, in many instances 2020 required minimum distributions already taken can be rolled over into retirement accounts – but not in all cases. First, allowed rollovers only apply to individuals’ retirement accounts or those inherited from spouses. Beneficiaries of inherited IRAs may not roll what was withdrawn back into their accounts. Second, rollovers of property distributed in-kind must be made with the same property or, if the property has been sold, with the sale proceeds.
Third, withdrawals must be rolled back into IRAs within 60 days of taking the withdrawal. This means that if you took your RMD more than 60 days ago, it won’t qualify for the waiver – unless the government extends the window. While no one can say for certain whether this will happen, past precedence suggests an extension is probable.
To understand if and how your RMD can be rolled back into your account, please consult your advisors.
It depends on whether you claim your child as a dependent for tax purposes. If you don’t claim your child as a dependent and your child is 19 or older and filed a tax return for 2018 or 2019, they should receive a rebate check.
About Your Questions Answered: With volatility at historic levels amid the COVID-19 outbreak, investors continue to be challenged by a daily barrage of news and unprecedented economic uncertainty. To help them navigate this difficult period, each week we are featuring answers to some of the top questions we have received.
Most importantly, please know that our thoughts are with each one of our readers – our clients, colleagues, business partners and everyone else within our community – as we strive to overcome this health crisis.
- Coronavirus COVID-19 Global Cases by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University (JHU), retrieved from: https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6.