Global economic news is catastrophic. One statistic sums it up; over 3 million US people filed unemployment claims in a single week – ten times the previous number and five times that of the peak seen during the Global Financial Crisis. There has been a sudden stop in the world economy, and in contrast to the usual pattern, it is the service sector that is bearing the brunt.
Governments have responded with massive fiscal support. Central banks have also been busy, it is the interest rate cuts that get the headlines, but it is the unconventional stuff that really matters for markets. The US Federal Reserve has eased the global dollar shortage, and they have intervened in the corporate bond market for the first time.
None of these measures will prevent the recession – we are already in it, but they should ease the pain and support the recovery. For China, data shows that their economy is getting back to normal, especially on the industrial side. Consumers are still hesitant, with low traffic on roads and subways, but it is accelerating, which is good news.
Financial markets have been boosted by the massive US fiscal package, but will have to face huge cuts in corporate earnings, set to fall by one-third or more in the US and other markets this year. Dividends are being suspended or cut. Defaults will rise and share buybacks, the biggest source of demand for US equities in recent years, will stop.
Many strategists point out that sharp rallies in bear markets are common and argue that we haven’t yet seen the lows. Some markets rose 20% last week and thereby entered a bull market! The reasons were largely technical, with the previous forced selling replaced by buying to rebalance. Will we rally further from here? There’ll be setbacks along the way, possibly big ones, but I do think we are on the course to recovery.