U.S. stocks are plunging as coronavirus risks outstrip massive stimulus efforts from the White House and Federal Reserve.
On Wednesday, the Dow Jones slipped to a three-year low, wiping out all gains since President Trump’s nomination. The index has lost about a third of its value since its February peak.
It’s hard to tell where the Dow is headed, as there is still a lot of uncertainty regarding the coronavirus crisis. Stock markets are very volatile and should remain until investors stop panicking.
Since panic seems nowhere near stopping, the Dow could plunge much further. Investors are turning their backs on risk assets and are rushing towards cash.
The Trump administration has put in place aid measures to help Americans face the crisis, but it doesn’t seem enough to reassure the markets. The $1 trillion stimulus package includes emergency business loans and checks for Americans.
Deutsche Bank expects the world to plunge into a coronavirus-fueled recession in the first half of 2020 before recovering for the rest of the year. The rapid spread of the virus in Europe and the United States and the faster-than-expected decline in economic activity are the reasons for the pessimistic outlook.
According to a Deutsche economist, first and second-quarter GDP declines will substantially exceed anything previously recorded since World War II.
China will see its GDP slump by 31.7% in the first quarter before soaring by 34% in the second quarter. The US economy will grow by only 0.6% in the first quarter before collapsing 12.9%, Deutsche says.
The world has seen four recessions since World War II, beginning in 1975, 1982, 1991 and 2009. The last recession was the worst so far, but the coronavirus-led downturn is likely to be even worse.
The causes are different. During the Great Recession, the financial markets were the problem. But not this time. Efforts to limit the spread of coronavirus will probably outweigh the proposed fiscal stimulus.
This is very different from 2008, it’s a biological event. The way to resolve this, the way to get past this, is efforts to contain the virus, and that’s going to be painful in the short-term.
The Great Recession was caused by a demand problem, while the coronavirus crisis is a problem of supply.
There is a shortage of essential everyday products like toilet paper as people are panic buying. More and more people stay in their homes. They don’t go anywhere to reduce the risks of catching or spreading the virus. Restaurants, malls, and other public places are shut down, which slows down economic activity and spending.
Deutsche Bank expects we’ll see a recession shaped like a sharp V. Economic growth should rebound rapidly in the second half of 2020 after a sharp plunge. But the difficulty of containing the epidemic makes estimates more challenging as contagion could hit major economies much longer.
Although Deutsche’s update includes GDP falling to levels never seen in modern history, signs of effective virus control in China could result in a rapid recovery in 2020. The global economy should grow by about 10% in the third quarter. Stronger than usual GDP growth could last until 2021.
So, the coronavirus-induced recession will be painful, but it should not last very long. If Deutsche Bank’s scenario materializes, we should see a quick recovery in stock prices when growth comes back in the second half of the year. But until then, we can expect the Dow and other indices to slip much more.
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Last modified: June 24, 2020 1:03 AM UTC