Where do markets go from here?

timeApr 12, 2020 | 12:42 pmYuval Bar-Or

On April 10, US financial markets were closed in observance of Good Friday.

The past week yielded significant stock price appreciation across global markets. The big question is where do we go from here? With some light visible at the end of the murky Coronavirus tunnel, have we seen the market bottom? Will financial markets rise further? Or will declines resume? Will the economy in general recover quickly, or will we be mired in an extended recession?

If the fight against the virus proves decisive in the next few weeks, we could see a sustained recovery. But is that a likely scenario?

The more likely path is that the fight against the highly contagious Coronavirus will drag on, without a decisive victory ending new infections. Countries and regions may gain the upper hand momentarily, only to encounter infection flareups for months to come. It’s possible the virus will become an annual tormentor.

Meanwhile, the Federal Reserve is throwing everything it has at markets, with inconclusive results. Promises of massive government intervention programs may also prove insufficient. Even if they are well-aimed, it will take some weeks or months for those dollars to reach their intended destinations.

With these negative factors in mind, stock market valuations seem high. Next week corporations will begin to report their first virus-impaired quarterly earnings. There is every reason to believe those numbers will be bad. But because the virus only began to impact business activity late in the quarter, as bad as the reported revenue and profit numbers look, the underlying economic damage may run even deeper.

In three weeks we’ve added 17 million people to the unemployment rolls. Any scenario suggesting a quick recovery requires these newly unemployed people to spend money to create a healthy demand for goods and services. Do you think they’re going to take whatever income they get from unemployment benefits or emergency government checks and spend like they have no worries in the world? No, they’re going to pay for necessities and desperately hang on to whatever’s left—if anything is left—to deal with an uncertain future. The lack of spending will mean weak demand which will, in turn, make the second quarter—ending in June 2020—lethargic at best, and panic-inducing at worst.

What if people get their jobs back soon? Wouldn’t re-employment give them the confidence to spend, thereby increasing demand? The answer is not reassuring: do you realistically expect companies will welcome back all furloughed or fired employees anytime soon? Even if virus infection numbers drop significantly, we won’t see everyone hired back because companies will be wary that the disease may flare up again. Furthermore, many companies woke up to the fact that they can run their businesses with fewer employees. Some may decide the time has finally come to invest in automation or artificial intelligence (AI) solutions instead of hiring humans.

As depressing as that may seem to us humans, it is an economic reality, and one that will be turbocharged by current circumstances. Automation is expensive, and that’s one of the main reasons companies have so far ruled against replacing employees with robots or AI. But the virus changed the math—in favor of machines.

It’s unlikely that once lockdown rules are lifted, everything will go back to normal. Some jobs will be terminated permanently and some workers may delay their return to work, wary that the danger has not yet passed. They may decide that exposure to crowds will put vulnerable members of their families at risk, including elderly parents and children with compromised autoimmune systems.

Overall, it’s difficult to see a path that offers a brisk V-recovery. The longer the recovery takes, the more irreparable damage will be done to the fabric of our economy as companies go out of business and supply chains are disrupted. We can pray for a sustained rally on both Wall and Main Streets, but it’s difficult to accept either as likely in the near term.

From an investor's perspective, this implies that keeping some cash in reserve may prove wise. If markets turn down further, there should be favorable buying opportunities.