- Marcus Brookes
- 16 April 2020
- 5 mins reading time
Contagion rates appear to be falling, stock prices and bond yields have been recovering… but it’s still too soon to relax. The economic data reflecting the negative effects of the lockdown are starting to come through, and the virus hasn’t finished its journey through the human population. If we remain patient and sensible, we could still benefit from a substantial recovery into 2021. For now, though, we need to understand what’s driven the partial recovery, and how to turn it from a short-term improvement into a longer-term trend.
Recent stock price recovery
Over the past week or two, we’ve seen stock prices and bond yields stage a partial but substantial recovery from their lows in March. The FTSE All Share Index was 35.0% down for the year-to-date on 23 March. At the time of writing it had reduced that loss to 26.4%.
While the demand for such higher-risk rated assets increased, that for lower-risk rated ones has declined. This has been reflected in falling prices of government bonds. When the price of a bond goes down, its yield goes up. The yield on the benchmark 10-year Gilt (UK government bond) was below 0.16% on 9 March 2020, but has since risen to around 0.29% at the time of writing. This is a healthier level, but a long way below the 0.8% that was being generated at the beginning of the year.
From the data I’ve seen, the recent partial-recovery in prices has come about, at least in part, as a result of people taking a more informed view of the challenges that we face. We’ve seen both the slowdown in contagion as a result of international lockdowns, and the remedial action being taken by governments and central banks to provide financial support. The subsequent better understanding of the crisis has enabled investors to adopt a calmer outlook.
But the problem is not yet solved.
Without a cure, we must continue to prevent
According to the Coalition for Epidemic Preparedness Innovations, there were 119 Covid-19 vaccines in development last week(1). Only five of those have moved into clinical development. Estimates for how long it will be before a vaccine is readily available, range from six to 18 months. While a cure remains unavailable, prevention remains essential.
New York State Governor, Andrew Cuomo, has been widely applauded for his proactive and practical approach to the crisis. During his 15 April press conference, he insisted on the need to remain vigilant, even as the contagion and death rates in his state appear to have slowed.
“We’re still in the woods” was the much-quoted phrase he used to describe the current situation. He went on to balance pragmatism with humour when insisting that those unable to maintain social distancing “must wear a mask or cloth or an attractive bandana or a colour-coordinated bandana”. Failure to do so could eventually lead to a civil penalty, but “you’re not going to jail for not wearing a mask”.
The message is clear: keep maintaining the social isolation, no matter how unpleasant the personal and financial sacrifices are in the short-term.
Let me turn to those financial sacrifices now.
We are beginning to see the effects of the lockdown come through in data form. Retail sales and factory output in the world’s largest economy, the US, were down by 8.7% and 6.3% respectively in March. Those are among the sharpest falls on record. Unemployment, which had been at record-low levels in a number of countries, has jumped sharply.
Companies have just begun releasing their sales and profit numbers for the first three months of 2020. The reports are likely to make for difficult reading. Already we’ve seen drops in profit of around 45% for three major international banks: Citgroup, Goldman Sachs and Bank of America.
But this bad news is exactly what I would expect after such a sudden and universal suspension of activity. As more economic data and corporate results come in, we’ll be better placed to determine how much long-term damage has been done by the necessary steps taken to the virus.
In our well-washed hands?
In the meantime, we could be at a watershed. Do we release the lockdown to alleviate the short-term financial pain, or continue with the existing measures for a more permanent benefit?
It’s in our hands.
The central banks are continuing to keep interest rates low and to push new cash into the financial system. Governments are pledging unprecedented support to households and businesses affected by the virus and lockdown. Health workers are risking their lives to look after us. We need to be patient and keep doing what works.
To borrow Governor Cuomo’s phrase, let’s make sure we’re out of the woods before we stop walking.
(1) Source: “CEPI publishes analysis of Covid-19 vaccine development landscape”, cepi.net, 9 April 2020.
These are the views of Marcus Brookes, Chief Investment Officer of Schroders Personal Wealth, as at the time of publishing.
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