America will remain in a state of rolling lockdowns for the next 18 months, according to analysis from Morgan Stanley and the Fed’s Neel Kashkaria. This brutal dose of reality hit the stock market hard. The Dow Jones Industrial Average (DJIA) fell more than 400 points on Easter Monday.
Although New York continues to flatten the curve in terms of coronavirus numbers, talks of re-opening the economy have fallen flat. Morgan Stanley’s biotech analyst Matthew Harrison said on-off lockdowns would likely remain in place until 2021.
Recovering from this acute period in the outbreak is just the beginning and not the end. We believe the path to re-opening the economy is going to be long. It will require turning on and off various forms of social distancing and will only come to an end when vaccines are available, in the spring of 2021 at the earliest.
The Morgan Stanley note hit Wall Street with a sobering dose of reality. The bank’s economists now estimate that economic activity won’t return to normal until then end of 2021.
This view on the delayed peak and slow return to work has led our US economists to revise their US forecast to a return to pre-Covid-19 levels not until 4Q21.
The Dow Jones turned negative on Monday after last week’s historic relief rally. As of 12:29 pm ET, the DJIA had lost 407.93 points or 1.72% to fall to 23,311.44.
After a strong bounce off the March 23rd bottom, some analysts now see a secondary bubble inflating in the stock market.
The S&P 500 and Nasdaq declined 1.44% and 0.45%, respectively.
Harrison’s note starts positively, suggesting that coastal regions of America will hit a peak in the next few days, driven by numbers out of New York.
This would put an initial US re-opening on track for mid-to-late May at the earliest.
But this is just a tentative first step. Re-opening would require extensive tracing technology, immunity testing, and hospital surge capacity, Harris argued. As a result, most of America won’t go back to work until a vaccine is introduced.
Unfortunately, we think there will still be a large number of workers not able to go back to work until a vaccine is abundantly available as social distancing cannot be fully relaxed until we have herd immunity (~60% of people vaccinated).
Neel Kashkaria, head of the Federal Reserve Bank of Minneapolis, struck a similarly downbeat tone over the weekend. He said, “baring some healthcare miracle,” America will remain in a state of on-off lockdowns for 18 months.
We could have these waves of flareups, controls, flareups and controls until we actually get a therapy or a vaccine.
A quick V-shaped recovery, he argued, is difficult to imagine.
Last week’s record-breaking stock market rally was driven by the early slowdown in the coronavirus spread. As that rally begins to fade, investors will need a new catalyst.
Morgan Stanley’s Harris said that only a vaccine could trigger a full recovery, which may not come until 2021.
Investors cannot afford to lose sight of the fact that only a vaccine will provide a true solution to this pandemic.
Across the pond in Europe, countries will likely keep their borders closed for the rest of the year. French President Emmanuel Macron announced strict border controls until September. And European Commission president, Ursula von der Leyen urged people to forgo European travel until 2021. She also said that only a vaccine would compel her to loosen border restrictions.
I’d advise everyone to wait before making holiday plans. At the moment, no one can make reliable forecasts for July and August. We will need to learn to live with the virus for many months, probably until next year.
Harris was at least optimistic about the timeline for therapeutics and, ultimately, a vaccine. There are now 70 potential vaccines in development, and he urged the government to start funding mass manufacturing projects.
With therapeutics available in the near term and a vaccine on the horizon, the market could start to ‘look through’ the slow US recovery and back to pricing in future US growth.
Until then, the rest of America is bracing for a new rush of coronavirus cases. New York is three weeks ahead of the rest of the country, according to Harris. And the country’s total peak will lag China by four times due to the “slow uptake” of social distancing measures.
Meanwhile, Wall Street awaits the first batch of Q1 earnings reports this week. J.P. Morgan, Citigroup, Goldman Sachs, and Bank of America are among the first to report in the coming days.
Last modified: April 13, 2020 4:30 PM UTC