Stocks were up strongly this week, rallying some 7%. This could well be because many of the things on the Corona Checklist are falling into place.
As a reminder, the checklist for the markets to rally relates mainly to the virus and really pertains to how quickly the world can get back to work:
1) Is the virus responding to lock down measures?
It looks like it is: last week this item had one tick but this week it now has three ticks, so full marks. This morning the rate of change in new infections globally, excluding China, is only 4%. This is down from 19% on 19th March. As of this morning, the US rate is 8% versus 50% on the 19th, Italy is now at 3% and Germany at 5%. So, it looks as if things are really getting under control and the lockdown measures are working.
2) Mass availability of antibody testing so it is clear who is immune.
This week a Swiss medical diagnostics company has said it is ready to ship high-capacity machines capable of more than 30 million clinically accurate coronavirus antibody tests this year. Other companies are working to do the same, so things are improving on this front.
3) Mass availability of conventional testing.
Here things are also improving. Not only is more testing already taking place but this week in the UK for example, news came out that two pharmaceutical companies working with Cambridge University will commence mass testing with a daily capacity of 30,000. To put that in perspective, yesterday the UK only tested 15,000 people.
4) Good results from a drug trial testing potential cures.
Nothing concrete yet but two drugs – Remdesivir and Avigan – are making the running. Very importantly this week Japan’s emergency economic package included support for the increased production of Avigan. According to Goldman Sachs, data suggesting that Avigan is an effective treatment have been reported, including clinical trials conducted in China. More news is expected on the efficacy of Remdesivir this month and on Avigan by mid-year. Many other drugs are also being tested, so it very much feels like that things are falling in place for a return to work and this has helped support equity markets this week.
On Wednesday, Wuhan – ground zero for the virus – lifted outbound travel restrictions after almost 11 weeks of lockdown.
In the US, Larry Kudlow – Trump’s top economic adviser – said the White House estimates it may be able to urge Americans to re-open the US economy in the next four to eight weeks. According to Bloomberg, Germany and Italy are beginning to debate how to relax some restrictions on public life gradually. According to the Financial Times France, Spain, Belgium and Finland are among many countries that have set up expert committees to examine a gradual easing in stay-at home orders. Furthermore, monetary and fiscal policy response has been fast and expansive, so it looks like policy makers have done enough to avoid the recession from becoming a depression.
So, as things stand the central scenario for industrial production is as follows: China has bottomed in February, Europe and the US will bottom in late April, so global industrial production should begin an upswing in May or June.
So how bullish should one be?
Well, the US closed on Wednesday with the S&P at 2,750. The all time high on 19th February was 3,393, which means the US market is only down 20% from its high and surely no one would argue that the coronavirus is a positive thing. So stocks should be down – by how much is debatable – but 20% for a global pandemic which has devastated employment across the world and destroyed demand does not seem like a lot. In addition, the post virus world might look different to the pre virus world – one certainty is there will be more debt – so this also has to be considered.
So, based on this, one should be constructive on equities but be cautious about overweighting the asset class at this stage.