For investors the past few weeks have been sobering. Stock market falls have been violently swift. Subsequent bounce backs have been partial and spasmodic, and may in any case be deceptive. For those who have put their investing on hold, when is the right moment to re-enter the water?
The recovery from the previous bear market over a decade ago offers some guidance. The last comparable shock to equity markets occurred at the height of the financial crisis. Indeed the decline in global stocks in the first quarter of 2020, of just over a fifth, was only a little less than the fall in the final quarter of 2008. Nerves were jangling then, too, but equities did start to pick up again in 2009, rewarding those who started to buy that year.
But there was nothing automatic about that recovery in the markets. It came about because policymakers got on top of the financial crisis, through two decisive steps. First and foremost, they recapitalised the banks, which were at the heart of the problem. And second, the US Federal Reserve and then the Bank of England adopted quantitative easing, overcoming fears that central banks had run out of ammunition after lowering interest rates close to zero.
Public health rather than the health of the banking system is at the heart of the coronavirus crash. A sustained recovery in stock markets will occur only when investors can see that governments are getting a grip on the epidemic. That goes beyond arresting the initial wave in cases and deaths, though that is an essential first step.
The economic impact of coronavirus has been crippling because medieval remedies—the word quarantine stems from the 40 days (quaranta giorni) that vessels from infected cities had to wait before landing in 14th-century Venice—are being used to fight the epidemic. Adopting the techniques used by South Korea, testing and smartphone surveillance, would be far superior, whatever the understandable worries about personal privacy. That will provide a key to re-opening economies that are now on course to experience even worse reverses than during the “great recession.”
Even with more sophisticated public health measures, the worry is a continuing cycle of outbreaks and partial lockdowns will prevent economies from springing fully back to life. A complete economic recovery will be possible…