Following the worst Q1 in history, stocks started Q2 on a rocky note as investors seemingly reckoned with the White House’s grim COVID-19 projections. Even as fresh data showed infection rates slowing in badly hit Italy and Spain, the large numbers of forecasted deaths in America may have understandably hit sentiment. We will leave it to the epidemiologists to assess whether these projections are likely to prove accurate as social distancing protocols remain in place for another month. As ever, our concern is capital markets and our readers’ financial futures. To that end, we offer a simple piece of advice: To navigate markets at this juncture, it is vital to mentally separate the disease, containment efforts’ economic impact, and stocks. The three are unlikely to move in lockstep, in our view, with stocks likely to improve before the other two.
Because this bear market materialized with record-breaking speed, it can be hard to see that markets actually worked as they usually do, pricing in the near future before the facts on the ground confirmed it. World stocks peaked on February 12. At the time, there were a handful of confirmed cases in America and Europe. No developed nations were officially on lockdown yet, but on that date the Mobile World Congress in Barcelona became the first major event to get canceled. One month later, the MSCI World Index officially crossed into bear market territory. By then, Italy was mostly locked down, while America and most other nations were curbing mass gatherings. Concerts, festivals, sporting events and other major gatherings were canceled, but businesses were still open and shelter-in-place orders had yet to take effect. Those came fast and furious the following week, starting in California on St. Patrick’s Day and then eventually spreading to the East Coast. But the first data confirming a deep economic contraction didn’t come until IHS Markit’s Flash Purchasing Managers’ Indexes for March arrived on March 24. That happens to be the day after the MSCI World Index notched its year-to-date low. Now, we have no idea if this low will hold. But that isn't our point. Rather, we think this stocks' downdraft preceding any confirming data proves stocks' strong tendency to move before data.
This is why we think it is critical, if challenging, to separate medical statistics and projections out of your stock market analysis. The big numbers in the White House’s projections on Wednesday morning have floated around the medical community and mainstream news outlets for the past couple weeks. They may be new to an official government PowerPoint presentation, but they are not new to investors. People have been buying and selling for several days with knowledge of these numbers, registering their opinions about them. Hence, we suspect they are already reflected in stock prices, alongside the initial sharp economic contraction stemming from the efforts to contain them.
Our viewpoint isn’t based on mere theory. Chinese stocks provide compelling evidence, in our view. Mainland stocks had a sharp setback in late January, as the national pandemic became apparent. Between January 13 and February 3—a stretch that included the week-long Lunar New Year holiday—the Shanghai Composite fell -11.8% in renminbi (to omit skew from currency fluctuations).[i] But then it had a sharp V-shaped recovery, getting close to breakeven by February 21. This, despite the fact that the number of cases under treatment didn’t peak until February 17.[ii] The total death count was just 425 on February 3.[iii] On February 21, it was 2,345.[iv] The mounting evidence of a humanitarian tragedy didn’t stop stocks. Now, Chinese stocks have since taken another turn down. But this seems much more like collateral damage from plunging Western demand on Chinese factories and exporters.
We think developed-world stocks are exceedingly likely to also rebound well before any improvement in medical or economic data is evident. We understand the temptation to look to infection rates for some hint as to when containment efforts will cease and businesses reopen, but we don’t think they will be any help to investors. The number of positive tests is likely to skyrocket in the coming days if for no other reason than this basic one: Testing is becoming more widely available. For the past few weeks, it appears mostly extremely ill people were tested, leading many to conclude true infection rates were vastly underreported. As testing becomes more widespread, we are likely to get a much more accurate read. That likely complicates getting an accurate view of the trends.
But, regardless, stocks rebounded in China long before COVID-19 was contained there. The recovery started while one hundred million migrant workers were still quarantined in their hometowns, major metropolises were ghost towns and factories nationwide were shut. Markets saw subconsciously what most people failed to fathom—that life would soon slowly begin returning to normal. A mainland investor who sold during the post-New Year panic and then waited for confirmation of quarantines ending would have missed an initial rebound. Even more true for those waiting to see economic data showing China is fully up and running. That is waiting for clarity, which in investing, has an extremely lofty price tag. Only by remembering how markets work—and compartmentalizing headlines with dreadful medical and economic news—would a mainland investor have navigated that stretch successfully.
We encourage folks here to do the same now. The medical statistics will surely—and tragically—get worse from here. It is hard, but try putting them in one bucket. Then put all the dreadful economic news and corporate earnings in another bucket. Label it “reasons stocks already fell.” Then, in your last bucket, place stocks. Label that bucket “leading indicator.” Remember that label, so that when stocks swing, you can remember they are hinting at what the economy will do, not what it has already done. Remember that while no one can predict the precise day it happens, stocks will likely tell us life is going to get better well before we actually feel and see that improvement in the real world around us.
[i] Source: FactSet, as of 4/1/2020. SSE Composite Index price return, 1/13/2020 – 2/3/2020.
[ii] Source: China National Health Commission, as of 4/1/2020.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.