Eye on the Market
Comment of the Day

April 08 2020

Commentary by Eoin Treacy

Eye on the Market

Thanks to a subscriber for this note from JPMorgan which may be of interest. Here is a section:

Eoin Treacy's view

Here is a link to the full report and here is a section from it: 

On the jobless claim number A virus-led spike in jobless claims is not quite the same as a spike in jobless claims during a demand led recession, given the speed with which unemployed people may go back to work once lockdown provisions are lifted, and given provisions in the $2 trillion fiscal stimulus bill designed to incentivize companies to hire them back (in which case gov’t loans could become grants)

A history of markets and unemployment I don’t know if the March 23 S&P 500 closing level of 2,237 will mark the low for this cycle, it may be too soon for that. When the bottom does occur, I expect it to be consistent with prior cycles in the US and Europe in which markets bottomed well before unemployment levels started to decline. Look at the stagflation era of the 1970’s; equities bottomed when unemployment was just starting to rise. The tech collapse, in which peak unemployment closely coincided with the market bottom, was the exception.


The bottom line: infection prediction models must be constantly updated to fit the observed actual infection curve in each country. As a result, what you learn by fitting parameters for one country has practically no value in predicting the evolution of infections in any other country; and the predictions within any given country can shift wildly with the level of testing and policy changes. The best these models can do is provide a very rough estimate of potential infection trajectories for a single country assuming that public policy, testing and behaviors do not change over time, and even then, they could be totally wrong. These models are most accurate when infections are shown to have already peaked, at which point they become redundant.

The most useful way of thinking about the current environment I have seen was provided by a friend, Akhil Patel, who described it as a recession in reverse.

His rationale is a recession generally begins with some portions of the economy shutting down and spreads to increasingly more as the contraction expands. The recession eventually ends when the central bank overreacts and cuts rates aggressively.

On this occasion everything shut down immediately and central bank action was extremely aggressive and rapid. However, the opening up of the economy will be relatively gradual.

However, the one thing constant in both is the fiscal and monetary assistance is likely to be present well after the worst of the contraction has passed.

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