The coronavirus could trigger a recession, but even if it didn’t President Trump will have trouble containing the impact of sentiment.
We are of course talking about what drives most economies: consumer sentiment.
If China is not transparent about Covid-19 case data, it’s surely not going to be open about the debilitating impact on the economy, small businesses, jobs, SMEs and the real state of supply chains there. This is problematic, since China’s role in the global economy is much expanded since SARS, 13 years ago.
The macro picture indicates that Covid-19 could achieve semi pandemic status, and the specter of fear will be brutal for the global economy. Teetering between correction territory and recession territory is a tricky affair.
We don’t yet have the full picture of the impact to the global economy, because outbreaks have just started in South Korea, the Middle East and Europe. But here’s some of what we do know so far :
- There have been 26 market corrections (not including this one) since World War II with an average decline of 13.7%. The average recovery takes 4 months. [Stock Market]
- 40% of the biggest companies say the coronavirus caused ‘major decrease’ in demand from China: CFO survey (CNBC).
- Covid-19 helped us achieve the fastest correction and biggest one day point drop in history on Wall Street. The S&P 500′s swift drop marked the quickest 10% decline from an all-time high in the index’s history, according to Deutsche Bank.
- As cases ramp up in the U.S. the stock market will not be spared greater levels of correction measures, possibly triggering a recession by the time the Presidential campaign gets more intense, if the virus is still around which experts figure it will be.
- In China, they are about 6 to 8 weeks ahead but we will experience the virus in a more severe way since we won’t implement Draconian social distancing measures.
One third of SMEs will run out of cash this month, and another 33% are at risk of going bankrupt in two months in China. The PBOC can’t do enough to solve the SME sector in China as Covid-19 does not seem to be going away any time soon.
Living with Covid-19 means accepting a Black Swan scenario, even according to Bill Gates. The coronavirus, Gates wrote, is behaving like a “once-in-a-century pathogen.” Sentiment has never impacted the global economy as much as today in 2020, and the Coronavirus will test our systems where information and data are the new oil. What happens when sentiment plummets for consumers amid social distancing and mitigation like behavior?
Meanwhile, a 20% correction to the stock market could occur if 80% of these red flags occur. The following are from the Bank of America. On March 1st, 2020 we are at about a 12% correction. Just about half-way there. Bank of America’s red flags for further damage are interesting, but likely will be vetoed by Coronavirus fear. Fear trumps all, even Trump.
- Federal Reserve raising interest rates
- Tightening credit conditions
- Minimum returns in the last 12 months of a bull market have been 11%
- Minimum returns in the last 24 months of a bull market have been 30%
- Low quality stocks outperform high quality stocks (over six months)
- Momentum stocks outperforming (over six to 12 months)
- Growth stocks outperforming (over six to 12 months)
- 5% pullback in stocks over the last year
- Stocks with low price-to-earnings ratio underperform
- Conference Board’s consumer confidence level has not hit 100 within 24 months
- Conference Board’s percentage expecting stocks go higher
- Lack of reward for earnings beats the
- Sell side indicator, a contrarian measure of sell side equity optimism
- Bank of America Fund Manger Survey shows high levels of cash
- Inverted yield curve
- Change in long-term growth expectations
- Rule of 20, trailing price-to-earnings ratio added to CPI is above 20
- Volatility index spikes over 20 at some point within the last 3 months
- Earnings estimate revisions rule.
So what does it mean? 80% of these would have to occur and then an economic recession is likely to occur. The signposts list was almost triggered in October of 2018 when it hit 79%. What followed was the worst December since the Great Recession of 2008.
Forecasting a Black Swan Event
How do you forecast the possibility of a global recession when central banks bail out economies with cash injections?
Japan and Germany are on the brink of a recession, with Hong Kong in a technical recession. Meanwhile, engines of growth like China and India slowed in 2019. China could lose significant GDP growth due to being the epicenter of the virus, which is about 6 weeks ahead of most countries in terms of the pandemic.
Is the novel coronavirus that exogenous variable, that catalyst to take some the stock market down? We’ll find out in the week of February 24th, that will revise Wall Street’s opinion on Covid-19, now that its spread in Iran, Italy and South Korea means further contagion is probable.
As I’m obsessed about the global economic impact of the virus, I’m going to list some curated notes here that pertain to Covid-19’s impact on the global economy and stock market. This will provide a historical reference point for further researchers, analysts and economics enthusiasts.
This section will be updated on a regular basis. So you can bookmark this article. Coverage began on Feb 23, 2020.
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Feb 25- 8:32 pm: Stock Market plunges furthest in 4 years due to Coronavirus fears.
The coronavirus wipes out $1.7 trillion in US stock market value in two days. The S&P 500 lost an estimated $1.737 trillion in value in two days, according to S&P Dow Jones Indices’ Senior Index Analyst Howard Silverblatt.
Feb 24- 2:15 pm: Coronavirus plunge wipes more than $250 billion from Big Tech stocks
Apple, Facebook, Amazon, Microsoft and Google parent Alphabet collectively lost more than $250 billion in value as part of a broader market plunge.
Feb 24–1:02 pm: Wall Street Dow Jones 3% correction Occurs on News of Global Virus Spread
Stocks fell sharply on Monday, with Dow Jones Industrial Average losses reaching as much as 1,000 points at midday. The number of coronavirus cases outside China surged, stoking fears of a prolonged global economic slowdown from the virus spreading. This marks one of the single biggest one day drops in the last 3 years.
12:05 pm: Goldman cuts US first-quarter GDP forecast
Goldman Sachs lowered its U.S. growth outlook for the first quarter as the domestic economy takes a hit from the global outbreak. The bank slashed its U.S. GDP growth forecast to just 1.2% from 1.4%, seeing a more severe drag from the epidemic.
11:36 am: White House planning to ask Congress for emergency funds to fight coronavirus spread
The White House is planning to ask Congress to approve an emergency spending package to help the Trump administration battle the spread of the coronavirus.
Feb 23–7:49 pm: China’s Factory Return Very Gradual but Beijing is Still in Lock-down mode
On Feb. 20, daily coal consumption of six major power plants was 42.5% less than the same period last year, according to Japanese bank Nomura, which has been tracking such metrics daily.
So far this year, pollution levels have been between 20% and 25% lower compared to the same period last year, according to Tapas Strickland of National Australia Bank (NAB).
High frequency data such as pollution levels and traffic congestion gauges in Beijing do not at this stage corroborate the upbeat official message of Beijing.
Feb 23 — 3:03 pm: Air New Zealand cuts 2020 outlook
Air New Zealand cut its 2020 outlook, as the impact from the coronavirus and subsequent capacity reductions appear set to offset benefits from lower jet fuel prices, Reuters reported. The airline said the negative impact to earnings was between $22.2 million and $47.4 million, Reuters said.
Feb 23 — 12:25 pm: Mnuchin: Central bankers will look at options for responding to virus
Treasury Secretary Steven Mnuchin, speaking after a meeting of G20 financial leaders, told reporters that central bankers will look at options for responding to the virus as needed. “I’m not going to comment on monetary policy, but obviously central bankers will look at various different options as this has an impact on the economy,” he said.
Kristalina Georgieva, managing director of the International Monetary Fund (IMF), said at the G-20 summit on Saturday that the virus will likely shave 0.1 percentage points off global growth in 2020.
Feb 23 — 9:45 am: IMF chief sees negative economic impact from virus, even if outbreak contained
The coronavirus that originated in China will have a negative impact on the global economy even if it is rapidly contained, and it would be prudent to prepare for more significant consequences, the head of the IMF said.
International Monetary Fund Managing Director Kristalina Georgieva, in a statement issued after a meeting of finance officials from the world’s 20 largest economies, called for coordinated action to contain the human and economic impact of the virus.
Feb 23 — 6:07 am: China’s Xi says coronavirus situation is still “serious and complex”
China is the epicenter of the new coronavirus, with 76,936 cases and 2,442 deaths on the mainland as of Feb. 22 (according to Chinese official numbers). Many businesses and schools remain shut, with economists predicting an economic growth slowdown for the country of 1.4 billion. SMEs in particular are at dire risk of going bankrupt.
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