Virus Closed Doors — Time Will Tell Whether It Opened a Window

MANHATTAN (CN) — With another day of big gains on Wall Street, whiplashed investors are staking out vastly different positions on the chances of a quick recovery. 

Stock futures indicated a big opening to trading Monday, and markets didn’t disappoint. The Dow Jones Industrial Average rose about 900 points in the first few minutes of trading, almost doubling those gains in the last hour of trading, a 7.5% increase for the day.

The Dow now sits at 22,649 points, about 7,000 points below its high point in mid-February.

Away from the New York Stock Exchange trading floor, IMC market maker Meric Greenbaum works Monday at his home office on Shelter Island. . (Lucas Greenbaum/courtesy Meric Greenbaum via AP)

Markets abroad rallied earlier on Monday as well. The Japanese Nikkei, Australian ASX 200 and South Korean KOSPI all gained about 4%, while Germany’s DAX closed with a nearly 5% increase. 

But Monday’s exuberance contrasts with negative opinions by some experts.

J.P. Morgan CEO Jamie Dimon told investors Monday to expect a “bad recession” in the coming months, while the bank’s head of global equity strategy predicted a “gradual bottoming out in activity” rather than a quick recovery. 

In an investor note, Mislav Matejka wrote to expect an 8.5% unemployment in the second half of the year, warning that “this is assuming that virus is history by June, which might prove significantly too optimistic.”

Few still hold out hope of a quick, or V-shaped, recovery.

“I think a V is possible, but I am worried that the outcome could be worse,” former Federal Reserve Chair Janet Yellen said in an interview on CNBC. “It really depends to my mind on how much damage is done during the time that the economy is shut down in the way it is now.”

Others on Wall Street are more bullish. Morgan Stanley’s chief U.S. equity strategist Mike Wilson said in an investor note over the weekend that the forced liquidation of assets is “largely behind us,” and now markets have “the most attractive valuations” since 2011.

“Current levels in equity and credit markets should prove to be good entry points on a 6-12-month horizon,” Wilson wrote. “Bear markets end with recessions, they don’t begin with them, making the risk/reward more attractive today than it’s been in years.”

Despite Wilson’s optimism, Morgan Stanley warned Friday that any recovery would be “more drawn out than previously anticipated,” with U.S. growth expected to shrink by 38%, and 15% unemployment in the second quarter of 2020.

Other investors took heart by news that New York has had its first drop in coronavirus-related deaths over the weekend. 

“I am beginning to get optimistic,” Pershing Square CEO Bill Ackman tweeted on Sunday. “Cases appear to be peaking in NY. Almost the entire country is in shutdown. 

Last month, Ackman warned that “hell is coming” and “America will end as we know it.” Now, though, he has taken on a more positive note. “Most corporations, banks and consumers entered the crisis reasonably well capitalized. [Interest] rates are extremely low,” Ackman wrote. “There is no housing or commercial real estate overhand.”

A lack of testing puts the true number higher, but Johns Hopkins University on Monday counted more than 1.3 million confirmed cases of Covid-19 globally. According to the data, the respiratory disease caused by a novel strain of the coronavirus has killed more than 73,000 worldwide, including 10,000 in the United States. Johns Hopkins says there are 337,000 confirmed U.S. cases.

Investors hoping for a truce between Saudi Arabia and Russia — who have fought an oil-price war since early March — have also turned wary.

Though news of the deal caused oil prices to skyrocket past $27 per barrel on Friday, what was supposed to be a Monday meeting is now set for Thursday, amid reports that relations between the two countries had soured.

In an interview on CNBC Monday, the CEO of Russia’s sovereign wealth fund stressed Russia was committed to working out a deal with Saudi Arabia and other OPEC nations to cut production. 

“I think the whole market understands that this deal is important, and it will bring lots of stability — so much important stability to the market — and we are very close,” said Russian Direct Investment Fund CEO Kirill Dmitriev.

Some investors stress meanwhile that a Russia-Saudi production deal is no panacea. “Because of the already occurring demand collapse, a coordinated response is therefore likely to be too little too late for inland crude markets, especially in North America, leaving local prices to have to retrace their recent gains,” Goldman Sachs analysts Damien Courvalin, Callum Bruce and Jeffrey Currie wrote in an investor note over the weekend.

Sheridan Titman, an energy finance professor at the University of Texas at Austin, said the Saudi-Russian price war, while important, is nothing compared with the lack of demand that has hurt oil companies.

“If this continues for much longer a period of time, the oil industry is in trouble,” Titman told Courthouse News. “It’s not something where the Russians and the Saudis can cut a deal and solve all these problems.”

Oil demand is still extremely low due to social-distancing guidelines around the globe aimed at slowing the spread of coronavirus.  More than 90% of the world’s GDP involves countries with at least some social distancing.

Titman added that many smaller energy firms will not be able to hold out for much longer, and that bankruptcies are sure to follow unless oil-producing countries coordinate to reduce output. 

“They would need to get output reduced by 20%,” Titman said. “I’m not sure we’ve ever seen reductions of that magnitude in the past, but it could happen naturally.” 

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