The stock markets around the world showed a recovery last week and were able to gain around 10%. So far, this is just a drop in the bucket after the markets had previously slumped by around 30%.
After all, the first panic has subsided, which can also be seen in the decline of the fear barometer, the volatility. In Germany this is the VDAX index, in the USA it is the VIX. Both came back during the week, but to a modest extent. With values of over 60, both "fear" indices are still at historically high levels, which investors haven't seen since the 2008 financial crisis.
How does it go from here? The camps are divided in the media. While some continue to expect a crisis that has the potential to outshine even the 1930s Great Depression, others believe in central bank support and rescue packages from various governments.
Looking into history, further losses can be expected if we were to face a recession. In the majority of such historic recessions, losses did not come to stop at 25-30%. Instead, they reached levels of 50% to even 90% in the Great Depression. A recession seems inevitable to me, the only question is how much damage can be prevented by monetary and fiscal policy. However, as long as the economic cycles are interrupted due to the corona virus, these measures can only partially cushion economic damage. Or would you go out to eat in the restaurant surrounded by man people just because the government pays the bill?
The further market development depends heavily on the development of the corona virus.
Corona Virus Review and Preview
The number of new infections continues to grow exponentially, despite the lockdowns initiated to date. However, it was clear that these measures would not take effect immediately, but with a certain delay. Since the incubation period of the corona virus is about one to two weeks, we should see a decrease in new infections over the next one to two weeks. Until then, the pressure on the health system and the people working there will continue to increase. The human drama, which after Italy has hit the metropolis of New York with great force and we can only hope that the situation will calm down soon.
It is unfortunate that our species only reacts when the water is up to its neck. We actually wait until the water makes breathing difficult. A consistent containment policy, which experts had recommended weeks ago, might have put us in a position that would allow us to return to a little bit of normality today. Instead, one has to ask how long this situation will continue. Fearfully expected weeks have already turned into months.
In my opinion, it would be necessary to maintain the foreclosure for a few more months. I share the view of the experts that even if we manage to flatten the curve of new infections, we should not immediately return to normal. Shortly thereafter, this would probably result in a second wave of diseases that would exceed the speed of the first wave. However, due to the political pressure from the economy I assume that this is exactly what will happen. The only hope is to find a therapy with which the disease can be treated more effectively or in the early development of a tested vaccine. These scenarios appear to be possible at best by the end of this year, probably not until 2021.
Risk Model Crash Protection
The Crash Protection risk model continues to show a red status for all regions and almost all countries. Security and capital preservation are top priorities. A return to green status requires a strong 20% recovery in equity markets.
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Bertan Gueler, CFA