Let’s begin with the virus. New cases and fatalities are on a declining trend in Europe and the US. The burden on hospitals has peaked and is coming down. Europe is beginning to ease their lockdowns. In China, restrictions have largely been lifted, there have been a few localised clusters, mainly due to returnees from abroad, but these have been dealt with swiftly and there has been no big second wave.
Lockdowns being eased, but case numbers still high
All this is very good news, but we must be careful. Europe is beginning to ease the lockdowns at a stage when the number of new cases is much higher than China had when it started to lift its restrictions. Some states in the US also look set to ease their lockdowns with even higher rates of infections. Lockdowns are being eased very gradually; in Italy, restaurants have been totally closed, and from today they can offer a takeaway service only. Restrictions are also being eased in Spain, but they remain much more severe than here in the UK.
Medical news has been mixed. Gilead’s trial of a drug to treat the virus has been disappointing but progress on a vaccine has been rapid, with mass testing starting soon. Seimens has produced an antibody test with 99% accuracy though the WHO is arguing against issuing the ‘immunity certificates’ that could follow.
Winning the war against the virus, but the battle costs are clear
So, it seems that the world is winning the war against the virus, but the enormous cost of the battle is becoming clear. More than 26 million US workers have filed for unemployment claims in the last 5 weeks. Economic forecasts are being constantly revised downwards. Numbers for Q2 economic growth in the US and Europe now stand at around -10% quarter on quarter – and that’s not annualised. I think they are still too optimistic.
It’s a similar story for corporate earnings. We’re in the midst of the Q1 reporting season for the S&P and EuroStoxx – it’s a big week for both. And the numbers have been dire – driven by financials. But it is Q2, which has over two months left to run, that will suffer the really big hit. Top down estimates see overall losses on a big scale for the S&P500. But bottom up estimates – where we sum the forecasts company by company – are still far too optimistic.
Equity markets continue to look beyond the lockdowns
With oil prices moving into negative territory, terrible news on the economy and earnings, you might have expected the stock market to tumble to new lows. But it has been remarkably resilient. Much of that reflects the forced selling – which accelerated the bear market – turning into forced buying, led by rebalancing flows. It also reflects the fact that the market looks ahead and is now focused on the lockdown exit strategies.
We are close to the absolute lows for the world economy. China eased most of its restrictions earlier this month and is well on the way to economic recovery. Europe and the US are set to follow suit, but with the greater risk of a ‘second wave’ of infections and social distancing likely to remain in place for many months, the recovery will be slower and more uncertain than in China.
Back in a bull market
My forecast is that the market will gradually gain confidence that 2021 will see economies and corporate earnings recover most of, if not all, the lost ground. Right now, it’s a balancing act between the dreadful news about the recent past and the hope for a better future. If I’m right, the stock market will end the year higher. The S&P 500 is within 12% of its high on 19 February, and it didn’t look especially cheap then. Performance is becoming increasingly concentrated on a small number of tech stocks – so don’t expect a huge rally, but I do think we are back in a bull market.