COVID-19 and Its Economic Impact

Market Reaction: March 19, 2020


The ongoing spread of the COVID-19 Novel Coronavirus has rattled financial markets in a very short period of time and has become one of the biggest threats to the global economy. While the global health crisis is by far the more important consideration, financial markets are also facing a difficult challenge. In order to “shut down” the virus, global policymakers must “shut down” economic activity to curb community spread. Due to these necessary, but disruptive, containment measures, the U.S. economy has experienced an external shock that is likely to result in a contraction in U.S. growth. Before we discuss Citi Personal Wealth Management’s outlook in greater detail, we would like to highlight a list of recent developments that lead us to our current perspective:

The Federal Reserve decided to cut interest rates to zero and announced that it would expand its balance sheet by $700 billion. Pledging to purchase $500 billion of U.S. Treasuries and $200 billion of mortgage-backed securities (MBS).

The European Central Bank announced a new bond-buying program worth more than $818 billion aimed to cushion the blow in Europe.

The U.S. Administration discussed a fiscal stimulus plan that could amount to as much as $1.2 trillion in spending. The proposed plan would include direct payments of $1,000 or more to Americans within two weeks. Supposedly $250 billion in checks could be sent at the end of April and another round of checks, bringing the total up to $500 billion, could be sent four weeks later if there’s still a national emergency.

The U.S. and Canada agreed to close their respective borders to non-essential travel. The European Union proposed a shutdown of non-essential travel for 30 days. New York City decided to close the nation’s largest public school system, along with all restaurants and bars.

The International Monetary Fund (IMF) announced that is ready to mobilize its $1 trillion in lending capacity to countries who are struggling to fight the coronavirus.

Each of these headlines has added to investors’ concerns that the impact on global growth in the second quarter of this year is likely to be significant and may be longer-lasting if the virus cannot be quickly contained. While global policymakers are now catching up to the spread of the virus with decisive policy actions, reducing the amount of community spread is paramount to limiting the degree of economic damage.  Citi’s economists believe that there’s about a 60% chance that the U.S. economy will decline sharply in the second quarter and then rebound in the third quarter. However, this depends on some return to normalcy by the end of May. We are hopeful that the containment measures will work as they have in some other countries. If that is not the case, then we could see a more protracted economic slump.

Investors should keep an eye on three things that we believe need to happen for a sustainable equity market rally in the U.S.:

  1. Stabilization in the number of infections.
  2. The passage of a fiscal stimulus program -likely in the range of $1 trillion.
  3. Further clarity on U.S. economic data.

With a limited amount of timely U.S. economic data available, the current environment is somewhat akin to driving a car without a navigation system. As time progresses and a roadmap develops, market uncertainty should diminish. Hopefully, alongside the rate of infections.

An immediate rebound in risk assets is not a guarantee as the expected slowdown will likely take time to sort through, but we believe that financial markets will likely recover before we see an upturn in real U.S. gross domestic product (GDP). While it may take more time for risk assets to find a bottom, Citi’s 2020 year-end target for the S&P 500 is 2,700 and represents upside from today’s level. We continue to believe that patience is a long-term investor’s best friend and the passage of time is likely to be the most effective cure for both COVID -19 and its impact on the U.S. economy. Please stay safe.

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