By Abhi Chatterjee, Chief Investment Strategist
In the last six weeks, I have seen more from my home office desk than all the time I have previously spent in my career on trading desks. To recap, what have we witnessed?
- The single largest day increase in VIX since 1990
- Two of the largest daily falls in the S&P 500 since 1927
- Central banks committing larger amounts of money to targeted relief than during the crisis of 2008
- And people ready to pay others $38 to hold a barrel of oil
Given stringent social distancing policies have been largely in place, a sharp decline in economic activity has already occurred, as shown by PMI numbers plummeting to unforeseen lows.
It is expected that we will see a deep recession in the Western, as well as Emerging economies. The question now though still remains, ‘How long will the recession last and what will the long-term impacts of the coronavirus pandemic be?’
Answers are currently only speculation, as details of how and when lockdown measures precisely will be eased are only just emerging – and, of course, there is also the real threat and future concern that there will be a second, significant spike of infections.
Extrapolation of data from past recessions are unlikely to help. All we know is that pent-up domestic demand should come back online, once social distancing measures gradually begin to be rolled back, but economic growth may still be sluggish due to an equally gradual growth in international trade and investment.
Following the pandemic’s outbreak, central banks globally have unleashed a flood of fiscal policies to help the private sector and the cornerstone of all developed economies. In a concerted action across the board, central banks in developed countries have assured individuals as well as corporations that no measure is big enough for them to use in these times.
Central bank rates are at all-time lows; asset purchase programmes are worth billions and involve buying up of below investment grade debt and asset-backed securities; and governments effectively are providing loan guarantees to mortgages providers, banks and the like.
It appears Western governments have opened their balance sheets for households and the private sector, in order to stave off bankruptcies and large-scale lay-offs. Credit is the fuel which businesses run on and the availability of credit will determine which parts of the economic anatomy remain unaffected by all this.
However, credit perpetuates on the optimism of growth – the promise of an increase in activity resulting in repayment. Without growth, be it sustained or otherwise, we face a self-reinforcing cycle of diminished confidence, bankruptcies and lay-offs. Thus, the over-leveraged world, which gorged itself on debt in a low interest environment, looks on with mounting concern and interest – if you pardon the pun.
The policies enacted now by public institutions face the ultimate dilemma and balancing act: the creeping devastation of a stagnant economy or a terrible human cost.
Abhi Chatterjee is Chief Investment Strategist at Dynamic Planner and helps lead its expert, in-house team of analysts, who each quarter risk profile the 1,400+ investments currently available in Dynamic Planner – to research and recommend to clients of financial advice firms.
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