In the past few weeks, global equity markets have seen only one direction - back to the pre-Corona all-time highs. The American technology index Nasdaq 100 has already achieved this goal and set new all-time highs.
Market participants and economists celebrated the end of reports of historical negative records. According to record-high unemployment data, an increase in the number of employees has recently been reported in the USA. The market participants also believed that the almighty central banks, especially the FED, were behind them. But it was precisely this FED that brought the markets back out of their delirium by merely promising to keep the current interest rate level and no cuts. The market reacted disappointed to the statement by the Fed, after which the markets worldwide went down by more than -5%.
It must therefore be noted that the price recovery since the low of the corona crisis has been largely driven by the hope that central banks will intervene. This explains the high discrepancy that has arisen between economic reality, the economic outlook and the course of the financial markets. All in all, a dangerous mixture, especially when you consider the increasing carelessness in dealing with the corona virus.
It remains that a new wave of infections has to be considered at all times. The fact that the virus has already spread to the population can make the second wave far worse in speed and scale than the first wave. The second wave was by far the more dangerous during the Spanish flu from 1918 to 1920.
"The second wave of the 1918 pandemic was much more deadly than the first. The first wave had resembled typical flu epidemics; those most at risk were the sick and elderly, while younger, healthier people recovered easily. By August, when the second wave began in France, Sierra Leone, and the United States, the virus had mutated to a much more deadly form. October 1918 was the month with the highest fatality rate of the whole pandemic."
The fact that the first wave mainly affected older people and people with previous illnesses and then became much more dangerous due to mutation in the second wave should ring the alarm bells. It is to be hoped that such a mutation is the exception and that the events of 1918 will not be repeated.
The crash protection risk model continues to give the all-clear for the most part. The USA is still green, the signal worldwide is neutral to positive. A complete return to 100% green status would have been possible, but was prevented for the time being by the last price losses. Thus, the risk outlook remains cautiously optimistic according to the model, but the risk of renewed panic seems low.
The potential for rapidly increasing markets in the short term is not very large. After the fastest 30% price drop in history, the central banks also helped the fastest recovery in history. The most serious economic effects seem to be behind us, at least according to the consensus of economists and market participants. We may face volatile sideways markets in the coming weeks and months. A further, rapidly emerging economic recovery and a return to normality could leave the markets a little more open. However, a rapid rise in the number of infections in developed countries could cause the markets to crash again. In this case, the majority of investors should expect the central banks to intervene again quickly, making a panic comparable to that in February and March unlikely. Unless the corona virus mutates ...
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Bertan Gueler, CFA