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Government Stimulus to Ease, Not Halt, Recession Slide

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As the number of COVID-19 cases more than doubled in a week, and markets continued their volatility, Brian Belski, Chief Investment Strategist at BMO Capital Markets, moderated a roundtable discussion with BMO experts to discuss the latest developments in the outbreak. Joining him on the call were Michael Gregory, Deputy Chief Economist at BMO Capital Markets, Greg Anderson, Global Head of FX Strategy at BMO Capital Markets and Lesley Marks, Chief Investment Strategist at BMO Private Wealth Canada. Special guest Dr. John Whyte, Chief Medical Officer of WebMD, joined the call to discuss the week’s most recent medical developments.

Dr. Whyte opened the call by discussing reasons to believe the rate of increase in fatalities is slowing. Read More

“The Surgeon General did announce publicly yesterday that the rate of increase of deaths has slowed, so we're still seeing new cases but the rate of increase has decreased,” Dr. Whyte, who, prior to WebMD served as the Director of Professional Affairs and Stakeholder Engagement at the Center for Drug Evaluation and Research at the USFDA, said on the call.

Additionally, Dr. Whyte pointed to optimism by the US National Institute of Allergy and Infectious Diseases (NIAID) that mitigation strategies are working. “So, overall, I do have this cautious optimism,” he said, suggesting that fatality rates might end up being quite a bit lower in the U.S. and other jurisdictions than early predictions.

The Economy - How Bad Will It Get?

Massive economic policy responses from the U.S. and Canadian governments will provide a strong base for recovery after the worst from COVID-19 is over, but they will not be enough to stop a technical recession in either country, Michael Gregory said.

He said the Canadian economy is set to contract at a 6.5 percent annualized rate in the first quarter, hit especially hard due to the collapse in oil prices, compared to a 5 percent contraction in the United States.

“On both sides of the border, these rapid and massive monetary fiscal policy measures won’t prevent horrendous GDP outcomes for March and April,” he said. “We look for both economies to contract at a 25 percent annualized rate for Q2.”.

The jobless rates in both the United States and Canada are beginning to show just how bad this “short-lived recession” will get, Gregory said. “We expect the Canadian jobless rate to hit 10 percent in the next couple months and it's currently 5.6 percent, he said, and for the US unemployment rate to top 8.5 percent, and it's currently 3.5 percent.”

The massive policy responses won’t prevent a recession from happening; however, it will lay the groundwork for a big rebound in the second half of the year, assuming COVID-19 infection rates level off and social distancing measures are reduced over the summer months.

“We reckon we'll see 30 percent annualized growth in Q3 alone on both sides of the border,” Gregory said. “However, the second half recovery won’t stop the full year from averaging negative growth of around, minus 3 percent in Canada, and minus 2.5 percent in the US which, interestingly enough, is about what we saw in 2009.”

Foreign Exchange Markets

Greg Anderson added his thoughts on the foreign exchange market, explaining that while there has been more volatility this month than in the past five years, there haven’t been any “flash crashes” like the ones seen in equities and oil markets. He said that currency volatility has been hit harder by falling oil prices than the impact of the COVID-19 outbreak. “The disease vector won’t drive foreign exchange, except for maybe a few countries that haven’t declared a lockdown yet, nearly as much as the oil vector will be the driver,” Anderson predicted.

Generally, most currencies are down against the US dollar, with the exception of China and Japan, which are up because they benefit from lower oil prices.

“These currencies have outperformed and I would expect them to continue to outperform for the next few weeks at least,” he said. Emerging market currencies, Anderson pointed out, are hardest hit, with currencies like the Mexican peso and the Brazilian real each down more than 20 percent.

Looking forward, Anderson predicted things will get worse before they get better, but that the most punished currencies will rebound as the global crisis eases.

Four Key Levers

Lesley Marks began her segment by running down the four key levers that are impacting market performance: fiscal policy, monetary policy, progression of the virus, and fund flows. “The key to market performance going forward will be watching the progression of the virus throughout the world,” she said, “with particular emphasis on the United States as the current epicenter for the virus.” The shape and magnitude of the economic recovery in China as the Chinese economy restarts, she continued, would also be key.

Our base case, Marks said, continues to be that COVID-19 will have a devastating, negative impact on global economic growth. “Current estimates for earnings for companies will be impossible to achieve, but also near impossible to forecast without knowing how long it will take for the virus cases to peak globally.”

We believe, she continued, that when the number of cases peaks, the market will move from its current sell-off phase to a bottoming phase and begin to focus on longer-term fundamentals, which will lead to equities outperforming bonds.

She said the key for clients to achieve their investment goals in this time of extreme volatility is to refrain from trying to time entry and exit points in this market. Portfolios should be well-diversified across asset classes and geographies, and aligned with their time horizon, risk tolerance, and wealth requirements.

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Brian Belski Chief Investment Strategist
Michael Gregory, CFA Managing Director, Deputy Chief Economist and Head of U.S. Economics

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