Advertisement

Markets are starting to realise just how bad the coronavirus crisis will be

As governments around the world throw everything including the kitchen sink in the fight against coronavirus, markets are reaching the “moment of maximum panic”. John Stepek explains what that means for you.

© Getty

Markets are looking a bit peaky again this morning. Why? You can probably blame the US.

The UK and most of Europe – even Germany – is getting close to pulling out all the stops to throw as much money at this problem as it takes (and more). The US was expected to follow suit. But just as with the financial crisis, politics is holding things up.

The government is throwing everything it can at this – the US will follow

On Friday, in the UK, chancellor Rishi Sunak made the radical declaration that the government will pay 80% of the wages of staff who would otherwise be laid off by businesses.

Advertisement - Article continues below

That’s quite incredible and we’ll devote more time to it in this week’s MoneyWeek (we’re going to be ramping up our small business coverage during this period as I’m guessing a lot of you are going to need it – if you don’t subscribe already you can get your first six issues free here, which is plenty of time to work out whether you find us useful or not).

Meanwhile, Germany – notoriously tight-fisted or fiscally prudent, depending on your point of view – has said that it will take on €130bn in new debt and create a €500bn bailout fund, throwing said fiscal caution to the winds. In total, this rescue package will amount to about 10% of German GDP.

Advertisement
Advertisement - Article continues below

If Germany is planning to spend whatever it takes, you can be sure that means the rest of Europe (the ones who haven’t already) will leap at the chance.

Advertisement - Article continues below

Long story short, governments generally are throwing all that they can at this thing.

However, as always, the most important player in all this is the US. And just as happened in 2008, the US is getting a bit bogged down in the politics. That’s because everyone wants a little bit of the bailout.

Everyone has a special interest group to protect and everyone has some sort of principled reason for standing against whatever goes through Congress until their special interest group is handed a little bit of the pie.

The US has a stimulus package which is meant to be worth $2trn sitting waiting to go through. The risk, as far as Democrats go, is that there is too much “no questions asked” money going on bailing out big businesses (an objection I’d almost always have sympathy with).

The main moves are as follows: small businesses get loans so they can keep workers on; US households get direct payments worth $3,000 for a family of four; and there will be as much as $500bn for big companies, plus another $50bn for airlines.

Advertisement - Article continues below

The Democrats want this to be more transparent than it is and they also want restrictions on share buybacks and CEO pay packages.

Anyway, odds are it’ll get pushed through some time today – playing politics is one thing but if this doesn’t get pushed through people are going to get fed up and start blaming whichever party can be painted as the blockers.

What does this mean for markets?

So what does all of this mean for markets?

Advertisement
Advertisement - Article continues below

A couple of things are clear. One, we’re getting close to the point where the authorities will be underwriting the vast majority of businesses for the duration of the lockdown crisis. There will still be a lot of people and firms who fall through the cracks, but the mass bankruptcy scenario is starting to recede.

Two, I agree with John Authers of Bloomberg when he argues that the “moment of maximum panic is close at hand.”

People are now talking about some absolutely horrendous outcomes – 30% unemployment in the US, plus a jump in weekly jobless claims to three million this week (that’s up from below 300,000 last week and close to 200,000 for the last two years or so).

Advertisement - Article continues below

Those might not be exaggerations but they can’t get a lot worse than that. If this stuff is being talked about loudly then you know that the market is getting closer to getting ahead of the bad news rather than constantly playing catch up.

However, you then have what you might call the “long, slow grind lower” phase that follows the point of maximum panic. There is less of a sense of collective horror, but the news still continues to get worse and worse.

We also still have the very real risk that something is going to blow up in markets, mainly the corporate debt bubble. I’m thinking and assuming that this can and will be underwritten by the Federal Reserve and its partner central banks around the globe – but Jerome Powell is going to be running around like one of those plumbers in an old cartoon, plugging leaks left, right and centre.

What’s my point? Don’t be in a rush to buy or to sell. Take your time. Build a watch list or review the one you currently have. Look at who will survive and thrive, look at who is going to struggle, and consider who might be struggling now but is likely to benefit greatly when the lockdown period is over (and it will end at some point – China is getting back to work, despite the risks of second waves of infection).

We’ll have a lot more on this in the next issue of MoneyWeek magazine. Get your first six issues free here.

Advertisement
Advertisement

Recommended

Visit/investments/investment-strategy/600709/the-coronavirus-is-scary-but-its-irrelevant-to-your
Investment strategy

The coronavirus is scary – but it's irrelevant to your investments

The spread of the coronavirus is causing alarm around the world. And, while it could be a serious short-term threat to human health, it’s not somethin…
24 Jan 2020
Visit/519022/money-minute-wednesday-4-december
Economy

Money Minute Wednesday 4 December: Britain's economic sentiment and American job figures

Today's Money Minute looks ahead to the UK's latest all-sector PMI survey, and America's private payrolls report.
4 Dec 2019
Visit/517688/the-british-equity-market-is-shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Visit/511212/reasons-for-investors-to-be-bearish-but-stick-with-the-stockmarket-bulls
Stockmarkets

There are lots of reasons to be bearish – but you should stick with the bulls

There are plenty of reasons to be gloomy about the stockmarkets. But the trend remains up, says Dominic Frisby. And you don’t want to bet against the …
17 Jul 2019

Most Popular

Visit/investments/commodities/gold/601444/these-seven-charts-show-exactly-why-you-must-own-gold-today
Gold

These seven charts show exactly why you must own gold today

Covid-19 is accelerating many trends that were already in existence. The rising gold price is one such trend. These seven charts, says Dominic Frisby,…
3 Jun 2020
Visit/investments/stockmarkets/601460/disease-rioting-and-mass-unemployment-so-why-are-markets-soaring
Stockmarkets

Disease, rioting and mass unemployment – so why are markets soaring?

Despite some pretty strong headwinds in the last year, America’s S&P 500 stock index is close to all-time highs. John Stepek explains why markets seem…
4 Jun 2020
Visit/economy/eu-economy/601463/why-a-stronger-euro-is-good-news-for-investors
EU Economy

Why a stronger euro is good news for investors

The fragile state of the eurozone has for a long time brought the threat of deflation. But the ECB’s latest moves have dampened those fears. John Step…
5 Jun 2020