A new, short-term reality
Financial markets clearly are reflecting our new reality, recognizing that the strong medicine required to thwart Covid-19’s spread is also likely to blunt short-term economic growth. The result may be a mild U.S. recession, although if it ensues we believe it could be short. We also believe that recession risk is heightened in other developed markets.
In China, where activity is slowly getting back to normal, we expect GDP growth of around 5% in 2020, compared with a reported 6.1% for 2019, with risks to the downside as the coronavirus outbreak plays out among China’s global trading partners.
This is where a few points of perspective specific to economics and markets may be valuable:
- We expect markets to reach this point from time to time. Global equity markets have experienced eight bear markets over the last 40 years, or one roughly every five years.1 Put simply, a significant market pullback was inevitable.
- We remain optimistic about the prospects for economic and market recovery. The last global recession, the global financial crisis of 2008 and 2009, was deep and long. We don’t view our latest challenge in the same light. The global financial crisis was a house of cards falling down, a crisis of excessive leverage, with the financial system itself in jeopardy. The system is sounder now. And although we do expect that global economies will contract in the second quarter, we believe that most will be in a position to rebound strongly later this year and early next year when the virus-related shock subsides and pent-up demand emerges.
- Global policymakers’ response will be key. Swift, decisive action is required to mitigate the virus itself and its economic effects. Because interest rates are hovering near and even below zero, policymakers can give themselves a truly low-interest loan. We believe that bold, appropriately targeted fiscal stimulus can help individuals and economies get beyond what should be a temporary setback. We believe such measures should be front-loaded, and should target immediate virus containment and eradication efforts, as well as support small and medium-size businesses and households that may need cash temporarily to stay afloat. Markets have responded to stimulus proposals lately to the extent that they believe the proposals can be effective.
I wrote several days ago about how navigating the uncertainty of the coronavirus outbreak was a matter of balancing what we know with what we don’t know. Some of what we learn in the weeks ahead may set the markets back temporarily. Making impulsive investment portfolio moves in a time of turbulence is never a wise move. We believe that, in the end, securities markets and broader economies will be resilient.
1 Source: Vanguard analysis based on the MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI AC World Index thereafter, indexed to 100 as of December 31, 1979. Both indexes are denominated in U.S. dollars.
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