Stock markets, especially in the US, have risen in recent days after the US government announced a massive stimulus programme. I am not buying it. I think the global economy will see its biggest peace time contraction ever recorded this year. Stock markets are not pricing this in.
Don’t get me wrong, I’m happy to see the massive stimulus packages being applied globally. They will help the global economy recover quite quickly, once this crisis has finally ended. And provided we don’t do anything stupid, like reverse globalisation. But I expect this recovery to take place in 2021 or 2022.
Recovery when?
I don’t think the prospects of economic recovery in 18 to 24 months is the rationale behind the rises seen in stock markets over the last few days.
Rather I think markets have bought into the idea promoted by President Trump that things will get back to normal soon. The thinking is that recent interest rate cuts and fiscal stimulus will mean the 2020 economic slowdown won’t be so bad.
It will be bad. Nothing can stop deep contraction this year.
The idea that the US can go back to work by April does not hold up to serious scrutiny. The argument that the economic damage from a lock-down will lead to more suicides than deaths from Corvid-19 doesn’t hold up either. Tragically, there have already been a lot more deaths from Covid-19 than there were suicides related to the 2008 crash, for example.
I think that markets will fall further. You often gets rallies in the midst of a major stock market crash. In his book, The Great Crash 1929, JK Galbraith described many such moments.
Markets will rise eventually. They may even return to the giddy heights seen earlier this year within 24 to 36 months. But I don’t think that rally will begin soon.
Peak pessimism
The time to move back into shares will be that moment when just about everyone is pessimistic. For as long as the US President assures us that everything will be fine soon, that moment of peak pessimism won’t have arrived.
But there are some companies that will do quite well during this dreadfully sad period. Manufacturing companies that can turn their hands to making ventilators may find they can minimise the damage from this crisis. If you were considering investing in such a company beforehand, then I would say now is not a bad moment to do so.
Also, I think this crisis will lead to a permanent shift in remote working, and accelerate the corporate shift to digital technologies. Look at companies that provide such technologies.
I note that shares in Blue Prism (LSE:PRSM) have fallen. I am not sure why, as their technology can enable certain office tasks to be automated and then controlled at a distance. I think the markets have mispriced shares in this company.