Oliver Mangan: Strap yourself in as market corrections bring volatility
Stock markets were due a correction after the major gains posted in the last three months, in particular since mid-May. It duly arrived over the past week, with big falls in equity prices. This is likely to herald a much more volatile period ahead for markets.
Concerns about a rise in new cases of the coronavirus in parts of the US and a fresh outbreak in China triggered talk of a ‘second wave’, have dented market confidence.
A sombre assessment of the economic outlook from the Federal Reserve added to the more cautious mood.
Fed Chair Powell’s comment that it is a long road ahead in terms of the economic recovery attracted a lot of attention. In particular, it will take a number of years to regain the 20 million net jobs lost in the US since February.
The Fed is projecting an unemployment rate of 5.5% by end 2022, still significantly above the 3.5% rate before the virus struck.
Meanwhile, a downbeat report on global growth prospects from the OECD added to the more cautious sentiment. The OECD sees world GDP declining by between 6% and 7.6% this year, with output in developed economies contracting by between 7.5% and 9.3%.
It says the recovery in activity will be hesitant, with an usually high degree of uncertainty around the pace of the rebound. Even in its more optimistic scenario, the OECD sees only a partial recovery in developed economies next year, with GDP still 3% below its level in 2019. This echoes the Fed Chair’s comment about a long road ahead to recovery.
The Fed, though, like other central banks, emphasised that it is in for the long haul in terms of the battle to return the economy to a strong footing.
Chair Powell commented that the Fed is “strongly committed to using our tools to do whatever we can and for as long as it takes” to help the economy recover.
There is ample liquidity in the financial system and interest rates will be anchored at zero or negative levels for the next number of years. This will help support risk appetite. Markets, then, are grappling with the dilemma that both fiscal and monetary authorities are fully committed to policy actions to fuel growth, but downside risks persist amid considerable uncertainty about the economic outlook.
On top of this, the course of the coronavirus over the second half of the year remains unknown. The rise in new cases of the virus in some States in the US that ended lockdowns early is a worry. It suggests that there are no short cuts to be had in tackling the pandemic.
Ireland’s strategy of opting for a strict lockdown and not starting to re-open the economy until the number of new virus cases had fallen to de minimis levels may well prove to be the correct one. Even then, fresh outbreaks can occur as happened in China over the weekend.
With the virus still prevalent, investors are likely to remain on tenterhooks in regard to news about new treatments and progress in finding a vaccine. Developments on this front are certainly capable of moving markets.
Overall, given the numerous competing forces now at play, there could be bouts of intense market volatility ahead. Indeed, we are already seeing it this week, with stock markets rebounding strongly yesterday on news of more policy stimulus. Investors need to be strapped in for a rollercoaster ride in these very uncertain times.
Oliver Mangan is chief economist at AIB
