Signs of Market Recovery Emerge Globally

April 8, 2020

A quick, V-shaped economic recovery could be on the horizon, judging by central-bank moves and early data from China, JPMorgan said Wednesday.

The Federal Reserve’s purchases of Treasuries, mortgage-backed securities, and municipal bonds have already helped the asset classes retrace half of their losses.

A sharp rebound in China’s March purchasing managers’ index reading suggests other virus-rattled economies can bounce back after strict containment measures and an economic slowdown.
Certain markets with “direct policy backstops” stand to rebound fastest, but even those with a more U-shaped trend “are nonetheless in a bottoming-out process with an upward bias,” the team of strategists wrote in a note.

An “always hoped-for” V-shaped recovery could be on the way and bring economies roaring back from their coronavirus-inflicted slumps, JPMorgan strategists said Wednesday.
Such rebounds — which forecast sharp recoveries after short-lived lows — have been the most common trend in economic growth and corporate earnings over the past 50 years, the team led by John Normand wrote in a note to clients. While the US and global economic output may exhibit a slower, U-shaped recovery as activity takes several quarters to normalize, gross-domestic-product growth and profits could surge to previous highs much faster.

Early signs of a V-shaped bounce are showing up in certain investments. The Federal Reserve’s unlimited purchases of Treasuries, mortgage-backed securities, and municipal bonds helped the related markets recover about half of their virus-related losses, JPMorgan said. High-grade US corporate debt and equities have already retraced one-third of their losses.

The central bank’s purchase programs and stimulus measures have also contributed to a decline in implied volatility, the team said. Certain markets with “direct policy backstops” stand to rebound faster than others, but assets stuck in longer troughs still serve as appealing buying opportunities, according to JPMorgan.
“Even markets that mirror the economy’s U-shaped path are nonetheless in a bottoming-out process with an upward bias over time,” the team wrote. “These deserve neutral allocations at worst and more likely small overweights given the risk/reward when the economy turns.”

New economic activity data out of China also points to a quick GDP rebound. The country’s March purchasing managers’ index reading jumped 9.8 points, to 50.1, after a 10.8-point decline in February, notching a rapid upswing from lows seen during strict containment measures.

Though there are “good reasons to be skeptical that other countries will tread China’s normalization path,” the early data suggests economic growth can bounce back in weeks if virus cases fade, JPMorgan said.

The argument between V- and U-shaped recoveries is critical for informing investors’ asset allocations in the near term, the bank said. Rebounds equal to recessions in length and depth suggest the broad investment landscape can retrace losses just as quickly as they were posted. Yet a pronounced downtrend and lasting damage to labor markets and business operations can prolong a recovery for profits and asset prices, the team wrote.

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