How long could a global recession last? 3 key factors

On a special, remotely recorded edition of Market Week in Review, Quantitative Investment Strategist Dr. Kara Ng and Research Analyst Brian Yadao discussed the latest coronavirus developments as well as the economic and market outlook going forward.

The coronavirus response: Governments, central banks take additional action

The week of March 16 saw the coronavirus spread globally and exponentially, Ng said, noting that containment efforts have largely failed. Slowing the spread of the virus is the next best option, she explained, in order to reduce fatalities and prevent an overload of the healthcare system.

To achieve this, governments worldwide are increasingly implementing strict measures, including social distancing, business closures, travel restrictions and quarantines. “These necessary health measures are wreaking havoc on the global economy,” Ng said, “which is why we’re seeing central banks and governments around the globe step in and provide monetary and fiscal stimulus.”

The latest actions taken include asset purchases and liquidity injections by the U.S. Federal Reserve (the Fed) and the European Central Bank, she noted. In addition, the U.S. government is proposing a $1 trillion fiscal stimulus package to help consumers and businesses, Ng said.

Global recession likely 

A global recession now appears increasingly likely, Ng said, with the key question centering around how severe and long-lasting it could be. The path to an economic recovery will likely depend on three factors, she explained:

  1. The spread of the virus
  2. The amount of damage that government containment measures inflict on the economy
  3. The effectiveness of fiscal and monetary policy in mitigating the damage

Ng stressed that the team of Russell Investments strategists does not claim to have an edge or unique ability to forecast the progression of the outbreak, and that leading medical experts have stated that such an exercise is effectively impossible. She also noted that the examples of China and South Korea show that the virus can be contained. “If cases in the U.S. and Europe can start to trend lower, it’s possible that a combination of pent-up consumer demand and global stimulus measures could lead to a sharp, or V-shaped, economic recovery,” Ng remarked.

Real-time data, however, indicates that the economic damage may be larger than anticipated, she noted. For instance, preliminary estimates suggest that the number of weekly jobless claims may soon match those recorded during the peak of the Global Financial Crisis (GFC), Ng stated. If the damage is worse than originally envisioned, the global economy will take longer to heal—which would mean a slower, U-shaped recovery, she said. In addition, if businesses are forced to shut down permanently, there’s a tail risk that ripple effects from that could cause a credit crisis, Ng added.

How much economic damage might markets have already priced in?

Ng said that markets should be prepared for continued volatility in the short-term, and that taking a long-term, diversified position may be worth considering. She noted that in a standard recession, the S&P 500® Index typically falls approximately 20-30%. Other recessions, such as the dot-com bust of the early 2000s and the GFC, saw the S&P 500 drop roughly 50% from peak to bottom, Ng said. As of mid-morning Pacific time on March 20, the U.S. equity market is down about 30% from mid-February, she stated.

“Markets appear to have already priced in our team’s base-case scenario of a standard recession,” Ng observed. Where they go from here will depend largely on the progression of the virus, the extent of the economic damage and the effectiveness of the global policy response, she said. “Our viewpoint is that another 20% drop in equity markets is less likely, unless we see very bearish outcomes relating to these three watchpoints,” Ng concluded.