The coronavirus response: How government actions could help mold a recovery

On the latest edition of Market Week in Review, Quantitative Investment Strategist Abraham Robison and Head of AIS Business Solutions Sophie Antal Gilbert discussed the ongoing volatility in markets as well as the global government response underway to combat the coronavirus.

Government response key to economic and market recovery

Equity benchmarks around the world plunged into bear-market territory the week of 9 March, Robison noted, falling 20% or more from their February highs. In the U.S., this meant the official end of an 11-year bull market, the country's longest on record. Credit spreads, meanwhile, have widened a bit, he said.

Robison expects more market volatility in the weeks ahead. However, he and the team of Russell Investments strategists believe a V-shaped economic recovery is possible if governments around the world act quickly to address the negative economic impacts of the coronavirus.

"In the last few days, global governments and policymakers have taken many steps toward fiscal stimulus. If these measures prove to be effective, businesses hard-hit by the virus could stabilise, and there could be a fair amount of stimulus still left in the system," Robison stated. He added that central banks could leave interest rates low for a lengthy period of time, which could allow equity markets to recover quickly when the outbreak dissipates. Such an outcome is the strategist team's central scenario at the moment, Robison noted.

Is a recession possible?

In the meantime, as individuals, companies and governments try to figure out how to adjust to life amid the coronavirus outbreak, changes in day-to-day behaviours are taking place, Robison said. These changes, including an increase in telecommuting, smaller group gatherings and limitations on travel, will continue to cause economic disruption, he stated. "With economic activity limited, it's possible that the U.S. and the globe could experience two negative quarters of GDP (gross domestic product) growth - which would be a technical recession," Robison explained.

With local commerce expected to take a hit, short-term funding issues appear likely for small businesses, he said. Because of this, Robison anticipates governments to respond by offering bridge loans or temporary financing.

Governments step up responses to combat outbreak

Looking back at the past few weeks, Robison noted that several actions have already been taken by governments around the world. These include a 50-basis point rate cut by the U.S. Federal Reserve (the Fed), and the recent injection of $1.5 trillion into markets by the New York Fed. Robison also believes that the Fed will soon lower interest rates to near sero.

Meanwhile, the Bank of England (BOE) announced a $39 billion stimulus package on March 11, with a large percentage of the money aimed at fighting the coronavirus directly. The rest, he said, will go toward short-term programs. Small and medium-sised loans will also be provided, Robison said. "In essence, the BOE wants its response to be targeted, timely and temporary," he noted.

Robison added that in China, steps have already been taken to encourage lending amid the crisis. In addition, there is continued talk of a larger stimulus package in the works, he said.

Key differences between today’s crisis and 2008

The current crisis is a bit different than what the world faced in 2008, Robison noted, as bank solvency is unlikely to be a problem this time around. He noted that if the stimulus measures being floated by governments around the world are effective, small- and medium-sised businesses will likely stabilise. Profitability for these businesses, however, is another issue, he said.

Robison explained that the firepower from central banks is very limited this time around, as many banks either already have interest rates near sero, or are expected to soon. "This means that any kind of major credit event could be cause for a bear market," he stated.

Robison said that, from a market outlook, valuation appears more attractive, while sentiment is still a watchpoint. Noting that governments around the world are taking the coronavirus outbreak seriously, he stressed the importance of taking a long-term view amid the volatility, and avoiding any rash decisions.