Proactive social distancing actions — the upending of daily activities — intended to slow the spread of COVID-19 have
abruptly put the brakes on the global economy. We have been framing our ongoing analysis of the volatile investment
landscape as a function of: 1) public health impact, 2) macroeconomic impact, and 3) market impact. At present, based
on the still exponential ramp of cases in the U.S., uncertainty is extreme. In the coming weeks, we believe there will
be an increasing amount of robust data that will help better define the health impact. For example, is, as expected, the
COVID-19 curve beginning to flatten? That data should include the calibration of social distancing practices to then
provide a more accurate picture of the outbreak’s macroeconomic impact. In turn, markets will benefit from a reduction
of uncertainty and improved visibility regarding a path towards “normalization” of economic activity, as we’ve already
begun to see in China. We recently sat down with Derek Hamilton, Ivy Investments global economist, to discuss the
economic and policy implications of the outbreak.
Taking stock of the impact to markets, U.S.
and global markets are clearly embedding
an economic downturn related to the
COVID-19 outbreak, and more generally,
the extreme market volatility reflects the
extreme uncertainty of the trajectory of
the health and economic impact. Year-to-date as of March
20, 2020 (as represented by the S&P 500 Index) U.S.
markets are down 29% and peak-to-trough, or the drop
from peak, (Feb. 19–Mar. 20, 2020) is down 32%.
In Europe, year-to-date returns through March 20
(as represented by the STOXX Europe 600 Index) are
down 30% and peak-to-trough (Feb. 12–Mar. 20, 2020)
is down 33%. While we don’t believe we are currently
in a recession, this type of market decline is alarming.
COVID-19 IMPACT ON KEY EQUITY MARKETS
Source: Macrobond, Ivy Investments. Data also show performance of the S&P 500 Index and STOXX
Europe 600 Index on year-to-date and peak-to-trough bases. Past performance is not a guarantee of
Over time, the typical peak-to-trough market decline is
29% in the U.S. That’s associated with a negative 2.2%
gross domestic product growth (GDP). In Europe, the
market hit on average has been 39% with a negative 2.6%
GDP.* The global market already appears to be pricing in
a full-on recessionary hit to the world’s economy. We think
that’s consistent with what we see in terms of landscape.
AVERAGE ECONOMIC, EARNINGS AND MARKET DECLINE
Source: Macrobond, Ivy Investments. Data show the average metrics of GDP, earning per share (EPS)
and index performance for all U.S. recessions since 1945, and all recession in Europe since 1990. Data
timeframes reflects peak (prior to recession) to trough (nadir of recession). Past performance is not a
guarantee of future results.
The Purchasing Managers’ Index (PMI), a supply chain
indicator, shows that globally, this is not just an air pocket.
We have seen a standstill of global activity consistent with
a meaningful slowdown, and like a pig through a python,
this will take time to be digested.
SUPPLY CHAIN DISRUPTION — WORLD, MARKET PURCHASING
MANAGERS’ INDEX (PMI)
Source: Macrobond. Data show the measure times for suppliers to deliver goods to end users and the
month-to-month disparity in deliveries. Past performance is not a guarantee of future results.
Incrementally, a negative impact in the U.S. from the social
distancing initiatives beginning to take hold in the U.S,
especially among small and mid-sized businesses, which
are enormous drivers of the U.S. economy. We’re seeing a
shutdown and dramatic slowing that will further cause a
decline consistent with what we’ve seen globally. This is
the economic shock that’s hitting both the supply and the
demand side of the equation. We’re seeing markets bake in,
we think, an appropriate hit commensurate to that degree
of economic shutdown.
The big questions are, how long is this going to be sustained?
At what point do we get better clarity and a path forward for
recovery? But in the meantime, uncertainty prevails.
Derek Hamilton will weigh in on both the monetary and
fiscal responses. None of this is happening in a vacuum.
We’ve had a very active fiscal and monetary response in the
U.S., as well as globally. This will be an iterative process.
The final point to highlight is how continued uncertainty is
creating the current extreme market volatility. In the U.S., the
key issue of uncertainty is how is this virus going to progress?
How effective are the current social distancing activities?
How long are these activities going to be sustained? And we
think that one of the best barometers to look at is the “canary
in the coal mine,” so to speak, the testing results, which is a
direct function of testing availability.
COVID-19 TESTS PROCESSED BY CDC AND U.S. PUBLIC LABS
Source: Centers for Disease Control and Prevention https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/testing-in-us.html
Data shows the number of specimens tested for COVID-19 by both CDC and U.S. public health labs as of March 12, 2020. Given the fluid nature of the COVID-19 response, this data may be incomplete.
All of this appears to be a setup for a light at the end of the
tunnel, being able to frame more specifically the impact and
understand if the markets are acting commensurate to the
fundamentals and to the areas that are oversold. Our objective
as active fundamental investors is to pick our spots for
opportunity, based on fundamentally driven forward view of
business prospects. There are going to be sustainable impacts
to the economy that create opportunities for businesses that
are positioned in the right spots. Conversely, there are going
to be concerns, including balance sheet and financing issues
that are going to impair areas of the economy. As active
investors, we want to pick our spots based on a proactive
view of company fundamentals.
Derek will share his insights with regard to the economic
landscape and monetary and fiscal policy measures.
Derek Hamilton: GDP forecasts continue to be up in the air.
Things are moving rapidly. The situation is very fluid. The
thought was that the Western World wasn’t going to move
toward the social distancing that you were talking about in a
significant way. But obviously that assumption was flawed.
The recent actions that we’ve seen from multiple European
countries has literally included confining people to their
homes, including a number of countries have a very limited
list of reasons why you can leave your homes. And obviously,
they’re forcing businesses to shut down. It seems like the U.S.
is quickly heading in that direction. We’re already looking at a
negative hit to GDP growth in the first quarter because of the
supply chain issues. Now, here we are in the middle of March,
we’re starting to get hits from the social distancing issues.
And then I think second quarter is really setting up to
basically show an unprecedented decline in activity.
If you take a step back and think about China, it went
through this and it started with social distancing. We’ve
recently seen data out of China that showed whether it’s
industrial production, investment or retail sales (think about
infrastructure spending, capital expenditures, property
investment) — All of those numbers were showing declines
on a year-over-year basis of down 15–25%, compared to up
5–10%. That’s a meaningful delta in a couple of months.
We believe we’re setting up to see something similar in the U.S.
It may not be quite as extreme because China locked people
in their houses for the most part, but we’re seeing very similar
deltas in terms of meaningful downdraft in global growth.
We do think that the third quarter will see a bounce back.
China had a shutdown in late-January, early-February. We
have various surveys showing that activity in China is back
up to around 80%of the pre-virus trend. The fact that social
distancing has taken a step back and China is starting to let
people return to work, that is obviously showing that there is a
bounce back once we get through this and the virus appears to
be under control. New cases have essentially flattened out for
the most part in China.
How will "Main Street" react?
We expect a similar situation to happen here and in Europe
in third quarter. However, we believe the risk is around small
businesses. Small businesses are the cog in the U.S. economy.
Whether you’re looking at employment or whether you’re
looking at GDP, small business accounts for 40 to 45% of total
employment and GDP. We’re setting up a scenario where these
small businesses are going to have to shut down. This begs
several questions. How long then can they survive? Do they
have reserves in place so they can see the other side of this
downdraft if there’s a significant cash-flow impairment? We
really don’t know the answer to these questions. That’s why a
policy response is so important.
SMALL BUSINESS IMPACT ON U.S. ECONOMY
Source: Macrobond and Small Business Administration. Data show share of employment and GDP attributed
to U.S. small businesses (defined as companies with less than 250 employees.) as of March 17, 2020. Past
performance is not a guarantee of future results.
Central banks are starting to unload the bazookas, in terms of
quantitative easing (QE), but markets really aren’t responding
like you would think they would. We had the Federal Reserve
(Fed), a couple of days ago in an emergency move, cut interest
rates 100 basis points. It introduced a new round of QE and
it’s likely the Fed will do more. We’ve had central bank easing
from pretty much across the globe, in Europe, the U.K., Japan,
emerging markets, everyone has joined the fight.
Central banks can address things like liquidity and market
functioning. In the environment we are in — people sitting at
home not working, having their wages hit, small businesses
are under pressure — we need a fiscal response. That’s why
we continue to focus on that as the primary offset to get us
through this situation until we can get to the other side. We
believe we have an economy that is ready to bounce back.
The need for big, meaningful policy response
The fiscal response is starting to come through in Europe.
We’ve recently seen announcements from places like France,
Italy and some of the Nordic countries announcing significant
fiscal packages. We think that’s going to continue to spread
throughout Europe. Obviously, China has already been
moving in that direction in regard to fiscal stimulus...that’s
why the U.S. response is so important.
Congress did pass a preliminary bill. It has been working
on a second bill that has some good things in it, but it’s not
nearly as large as needed. We’re starting to now hear talk from
congressional leaders and the White House saying that we
know that the response on the fiscal side needs to be much
more meaningful than what we initially thought.
If we do, in fact, get a fiscal response, which I think we’re
going to, it needs to be quick and it needs to be crafted in an
appropriate way. And what I mean by that is if you go back
and think about prior meaningful slowdowns, fiscal responses
have taken various forms. One was getting money to people.
Sometimes that was a tax cut or something like that. But we
need a cash injection right now, which you have seen at times
in different recessions. We need money flowing into people’s
The second thing we need is support for small businesses.
Whether it’s loans, regulators pushing banks to be flexible,
or actually getting cash to those companies, those are the
types of responses that we need. If we get an announcement
on fiscal policy and it’s something like small tax cuts and
infrastructure that is not an appropriate response in the
environment that we’re in. Not only do we need to focus on
how big the fiscal response is, but also how it’s crafted. We do
think that it’s going to come, but it needs to come quickly in
order to preempt these dislocations.
Dan Hanson: Thank you, Derek.
In summary, the U.S. is in the process of taking a severe
economic hit because of proactive social distancing and the
overall reaction to the government, business and citizenry’s
attempt to contain the spread of the virus. That’s driving the
immediate slowdown, but these actions are not happening
in a vacuum. Fiscal and monetary measures will continue to
evolve to both rebut the impact and accelerate the ultimate
recovery. In the meantime, uncertainty rules, as has been seen
in the markets in terms of the CBOE Volatility Index and other
uncertainty measures at all-time highs. We expect continued
uncertainty to drive this volatility in the market.
ANXIETY OVER COVID-19 TRIGGERS RECORD-HIGH VOLATILITY
Source: Chicago Board Options Exchange (CBOE) Volatility Index. Data shows the historical measurement of expected market volatility based on the expected level of price fluctuation in the S&P 500 Index options from
2000–2020. The higher the value, the more the expected volatility. Past performance is not a guarantee of future results.
However, we do see a clear path forward as that curve
becomes better defined and ultimately flatten and reverse.
We’ve seen in China in particular how proactive social
distancing and testing have allowed a path towards normalcy
after peak infections. In the U.S., we see broad CDC and
public laboratory testing availability aggressively increasing
at present. As that data set becomes more robust and is
coupled with a clear scientific understanding of the spread
and treatment of COVID-19, uncertainty will subside from
peak levels. Much of that forthcoming data will be “bad
news” by any measure, but nonetheless certainty rather
than uncertainty will support improved market functioning,
and reduced volatility. We believe the timetables for health
mitigation and vaccine readiness are now being assessed in
terms of months and quarters, not in years, and we expect
improved health data will help lead to better visibility around
the duration and extent of the ongoing economic interruption.
In the meantime, the economic landscape is evolving and
market volatility reflects that uncertainty. We’ll continue to
share our insights and bottom line. We do think this creates
an actionable environment for fundamental investors. We’re
going to take that focus and approach of looking from the
bottom-up at the actual economic impact and what it implies
in terms of security opportunities for active investors.
The latest on COVID-19
An update on the status of COVID-19 testing was provided
during President Donald Trump’s press conference on
March 18. While health officials are working through the test
samples, there’s an apparent backlog, running at least five
days behind. Representatives from the president’s COVID-
19 task force acknowledged there will be a surge in positive
confirmed infections as tests are completed. Based on Ivy’s
data analysis, we believe this is already happening.
The CDC has reported about 1,600 confirmed cases as
of March 18. By comparison, Johns Hopkins University
reports more than 7,200 confirmed cases. We believe the
discrepancy in reported cases is likely to narrow as the
testing backlog diminishes. However, we don’t currently
have an indication of new infections. We are likely to have a
clearer picture of the COVID-19 spread in the next couple of
weeks as labs work through the testing backlog and social
distancing practices begin to have an impact.
HISTORY OF PANDEMICS
SARS (Coronavirus beta)
2003–2004 (15 months)
2009–2010 (14 months)
Spanish Flu (H1N1 virus)
1918–1919 (12 months)
SOURCE: Centers for Disease Control and Prevention.
Past performance is not a guarantee of future results.
The opinions and commentary expressed by Mr. Hanson and Mr. Hamilton are not meant as investment advice or to predict or project the future performance of any investment product. The companies discussed by
the panel may or may not be holdings in investment portfolios managed by Ivy, and such discussion is not intended to reflect a current or past recommendation, investment advice, an indication of trading intent, or
a solicitation of an offer to buy or sell any securities or investment services. This is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any speciﬁc
security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s speciﬁc objectives, ﬁnancial needs, risk tolerance and time horizon. The views of the panel are
current through the date of the event and are subject to change at any time based on market or other conditions. No forecasts can be guaranteed.
Risk factors: Investing involves risk and the potential to lose principal. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country,
and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the value of such securities may
fall as interest rates rise.
The S&P 500 Index is a float-adjusted market capitalization weighted index that measures the large-capitalization U.S. equity market. The STOXX Europe 600 Index is a float-adjusted market capitalization weighted
index that measures the small-, medium-, and large-capitalization companies of 17 European countries. It is not possible to invest directly in an index.
The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets
in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises
caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined