• In our view, the fear and countermeasures surrounding COVID-19 are more serious economic issues than the virus itself. The reactions of governments and individuals are likely to push the world into a recession.

• We think stocks are bottoming, but that process will take some time. A decline in new cases, falling credit spreads, rising Treasury yields and oil prices and stable weekly jobless claims are potential signals of when the market might turn higher.

This was a week for the history books: The coronavirus, oil price collapse, liquidity pressures and rising quarantines, travel bans and business and school closures caused widespread panic, pushing stocks into a bear market. The S&P 500 fell 8.7% (including nearly a 10% gain on Friday), with other indexes down more.1 Energy and the usually defensive utilities sector fared the worst.1 In other markets, Treasury yields plunged to below 1% across the curve, the dollar rose 3%, gold fell 9% and oil was off 23%.1

10 Themes To Consider

1. The sharp drop in stock prices was unprecedented, and we think most of the panic stage is in the rearview mirror. U.S. stock prices climbed 44% from December 2018 to February 2020.1 Stocks then dropped more than 20% in just 16 trading days, marking the fastest bear market in history.1 This will take some time, but we think the bulk of the panic selling has already occurred, setting the stage for relief rallies like what we saw on Friday as an extended bottoming process begins.

2. A U.S. and global recession looks likely. The world has never witnessed such widespread shutdowns and quarantines outside of wartime. As daily activity around the world is reduced, economic growth will slow to a crawl. We peg the odds of a recession at more than 50% as we see deflation, supply and demand shocks, rising unemployment and falling wage growth. We expect the economy will experience sharp, but hopefully short-lived slowdown.

3. The plunge in oil prices is causing a credit crisis. Oil prices fell close to 25% on Monday following price cuts from Saudi Arabia.1 Falling oil prices caused a spike in credit spreads, particularly within the energy sector. We expect to see ratings agency downgrades, which could cause further liquidity issues. However, unlike during the financial crisis, banks are well capitalized, which should provide an economic buffer.

4. Market liquidity is also under pressure. The pandemic and oil carnage caused the worst week for corporate credit markets since the financial crisis, as spreads widened sharply. Bid-ask spreads in the Treasury market also widened, which is a classic sign of reduced liquidity. In our view, bond market liquidity would need to improve before we could call a bottom for equities and other risk assets.

5. More fiscal and monetary stimulus is needed. The proposed $50 billion congressional package focuses on outlining public health responses and extending the safety net, but doesn’t address the likely sharp economic demand shock. An impactful stimulus package would probably cost between $300 and $500 billion and would include a combination of tax rebates, payroll tax cuts, employee retention credits, small business loans and industry-specific relief for hard-hit sectors. For its part, the Fed has already cut rates to zero, injected massive liquidity into the markets and will be expanding and broadening its asset-purchase programs. The real economic stimulus is coming from financial markets, as global short rates have plummeted, the 10-year Treasury yield dropped over 2% in 15 months, refinancing activity increased and oil and gasoline prices declined sharply.1

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