We’ve seen a lot develop over the last two weeks. The majority of governments around the world are now taking this crisis as seriously as it needs to be taken from both a health and economic perspective. As far as I am concerned there are two main questions that have occupied my thinking relating to business and in turn investment markets. Firstly, how long will the economic shutdown last? And secondly, how quickly can the economy recover? Both raise more questions than answers at this point because there are simply so many unknowns. However, I have concluded that the answer to the first question is a logical one, while the answer to the second question is more complex.
I believe the shutdown will continue until there is a vaccine. That is the reality. The shutdown and restrictions in place will need to continue in some way shape or form until then. While a vaccine will literally cure the disease, until then everything is about managing the spread of the virus. If the virus is around, even in relatively low numbers, and the government was to lift restrictions then we are going to see it spread again in a second and third wave along with increased restrictions each time. From everything I have read a vaccine is a 12 month proposition. But we are going to find out just how quickly this can be done though, as however many billions of dollars are needed to create a vaccine, it is going to pale into insignificance against the trillions it will save the global economy.
With regards to how quickly the economy can recover, that is much more difficult to answer. No one knows the answer. I am optimistic that a version of the ‘business hibernation’ plan will work and the recovery will be swift. Everyone is going to feel the pain but everyone is going to work out how to get through the 12 months and get to the other side. In simplistic terms, the approach to managing the nation and its people’s expectations should simply be focusing them on the basics. The government needs to make sure everyone has food, shelter, water and power for the next 12 months. If you’ve that then you’re going to get through and live to fight another day. There is lots to work out here logistically but much of this is being put in place, rent and mortgage payments being deferred, wages and essential bills being covered. It gives everyone the best opportunity to restart, quickly and unimpeded, once everything reopens.
In Australia, Scott Morrison and the Federal Government, while initially slow to act, have caught up quickly in the last 2 weeks and are managing both the health and economic crises well in my view. Morrison is increasingly looking like a war time leader in his press conferences. The Government has a strategy and they are implementing it quickly. It’s not going to be perfect, it’s a crisis, that not how it works but they are stepping up and throwing everything at it. Meanwhile, The USA and a number of European countries are doing a terrible job of managing the health side of the crisis but appear to be responding ok from an economic perspective with massive stimulus packages across the board. It is worth noting that when announcing 6.6m new jobless claims for the week in the USA, the stock market actually went up. This goes back to what the impact of data being relative to expectations, as per my last note.
While share markets across the world have improved recently, we probably haven’t seen the bottom or the end of volatility. Fear will likely return in due course as the significant economic impact of the shutdowns across the world will bring both data and images that will draw comparison to The Great Depression. It may feel like that in the coming months. The media will love it. Investors will not. So shares will likely fall again based on fear. Do not be surprised by any of this. But the situations are completely different. That downturn continued for years (1929-1933) as governments of the day cut costs and spending and there was no end in sight. Today we have governments that are doing everything they can to stimulate the economy and we know that it is likely there will soon be a vaccine that will enable the economy to reopen for business. The foundation for today’s economy is very different and there will be good opportunities ahead.