Some economists think unemployment could surge to 20% which would be much higher than in the 2008 crisis when unemployment peaked at around 10%.
Several economists are forecasting an economic contraction of between 6-8 per cent which would make it worse than the 4 per cent contraction seen in 2008/9.
However, a lot of the forecasting depends on the impact of social distancing and there is still a great deal of uncertainty.
Furthermore, putting a dollar value on the cost of a crisis is difficult when any cost necessarily depends on the reaction of the stock market resulting in a vicious cycle.
The financial crisis lingered for a long time but the coronavirus crisis could be short-lived if social distancing proves effective.
If the virus is contained effectively then it could end up costing only a fraction of the GDP that was lost in the 2008 crash.
On the other hand, if estimates do not account for second and third waves of the virus (or numerous knock-on effects caused by financial stress) then they could miss the mark.
The only data we have really seen so far are the jobs numbers. We are yet to see companies report earnings and the truth is that we are about to see a tidal wave of terrible earnings reports.
Central Banks Have Our Backs Faster This Time
That said there is still the case that central banks have moved quickly to inject stimulus into the market to avoid financial contagion. Much more quickly than they did in 2008.
This stimulus has been large and so far been effective at keeping the financial system ticking over and helping to reduce volatility in the stock market.
Health-wise, testing has been ramped up and new virus cases have definitely been flattening.
So there is definitely a case to be made for bulls that the -34% drop represents the bottom and that investors are now looking ahead towards a recovery in 2021.
However, even if the market did hit a bottom last month there are bound to be some big bumps along the way to a recovery and there is simply too much uncertainty right now to say that the damage is done.
What’s A Fair Price?
Howard Marks said in his recent memo that the market is probably fairly priced for an optimistic view of the crisis and I think that sounds about right.
In other words, if you believe that cases are coming down, the virus is on the way out and the economy can reopen in a few weeks time, then stocks are probably fairly priced.
But if you believe that the virus is not under control and the lockdown will go on longer than expected (or that there will be future waves with more lockdowns) then stocks are expensive and have some room to fall.
At this point, it’s worth remembering that the last serious pandemic we had was the Spanish Flu which lasted about 18 months from March 1918 to the summer of 1919. In that period the virus came in three waves with the second wave being the deadliest. (TIME).
It seems unlikely that this current virus is going to just blow over and things are going to go back to normal any time soon. Especially considering the poor handling that governments have shown so far. This thing could drag on for months with second and third waves.
With that being the case, I think there is a strong argument that the market will at least move back towards it’s recent low even if it doesn’t lurch too far below it.
Where Is The Risk?
In times like these I find it helps to think simply and consider ‘where is the risk’?
Is it riskier now to buy, after a 20% rally off the low, or is it riskier to short, with the possibility of a V-shaped recovery?
For me, the risk here is clearly to the downside.
With so much uncertainty about the staying power of the virus and so much bad news yet to come, it would be risky to dive into the market when it is only 19% from it’s all-time high.
Given the gravity of the current crisis and the fact sharp rallies often occur in bear markets, I’d say the chance of us moving back to the recent low is perhaps 30% to 50%.
The bottom line is that this is a nasty environment for investors with unprecedented economic shutdowns.
This rally has the hallmarks of a dead cat bounce. It is likely to be a complicated mix of short covering, mechanical buying and optimism that the Fed has everything under control.
We will recover from this crisis eventually but I think it will be a while before the Slingshot will be ready.