There isn’t much consensus about the future of how the COVID-19 pandemic will evolve.
Even the experts who advise world leaders can’t provide a clear timeline. But, something all the analysts and economists are in agreement on is that there will be a recovery at some point.
Some are still hoping for a V-shaped one. Others are more inclined towards a U-shaped one. And, some see a long slope back towards economic growth.
But, for traders, we want to know where the bottom is and look for trading opportunities.
There are some clues and markers that we can pay attention to that will give us some forewarning of the turnaround. And that’s the thing with the markets. They are likely to start recovering quite a bit before the media and officials declare that the pandemic is under control.
When Do We Go Back to Work?
In order to have a better idea of how a recovery will work, we have to look at the underlying reasons for the economic problems now.
A lot of people are focusing on increased unemployment. That does have an effect on the economy, obviously. However, it’s not the primary cause of the stock market crash and the threat of a depression.
The problem is uncertainty. Authorities have forced business activities to a halt in order to keep people from interacting. We don’t know how long the lockdowns will be in place. This means business owners have no idea how long they will have to provision.
Businesses keep burning cash while stopped. This is the case even with the massive government subsidies and handouts, many of which won’t actually reach the people until months from now.
Inventory, it’s Always Inventory
Not knowing how long they will have to hold out, businesses are desperately doing everything they can to keep cash available. That goes from suspending dividends, buybacks, wage cuts, hiring freezes, not restocking inventory, all the way to layoffs and seeking bankruptcy protection.
On Monday, clothing retailer Stockmann became the first European company to file for financial reorganization. The lack of spending, shrinking inventory and cutting production is what is dragging down the economy. Unless that reverts, we are heading into a recession.
Businesses will not change this attitude until authorities give them clear guidelines about when restrictions will be lifted. Germany, for example, last week shipped over 100K antibody tests that will allow them to provide “health certificates” for people who have already had the disease to return to work.
The UK is trying to ramp up a similar program. Some analysts have argued Lombardy has reached herd immunity levels of infection. And, the Governor has intimated that restrictions might be lifted in two to three weeks’ time.
And the Markets?
Markets will try to get ahead of the action by authorities. Stock indices across the world were dragged down by a lack of liquidity. But, with an unprecedented amount of cash being doled out by central banks, that’s not a problem anymore.
The stock market is perfectly capable of rising even as job losses mount and businesses shutter through capital injection from central banks. The perception of a turn around in the number of new cases can be a sign that authorities will soon relax measures. And that, of course, helps spur risk sentiment.
Leaders talking about extending lockdowns would likely weaken risk sentiment. Markets don’t need to wait until lockdowns start to be eased, they just need a firm date. If any major country gives a firm date on reopening, the markets will likely price in the rest of the countries following suit based on their case counts.
After Easter, companies start reporting their first-quarter results. This also gives their perceptions of the current situation. If they have the confidence to provide guidance, to restart production, and start building inventory again… then we might see a strong trend towards recovery.