Global GDP is expected to contract by around 5 per cent in 2020 – making it the biggest recession since the end of the second world war. Moreover, it is unique in that no other global recession over the last 150 years has been caused by a pandemic. At the risk of overuse of the term, there is no doubt that we are in an ‘unprecedented period’. 
Recessions are often triggered by a financial crisis (the most recent being the global financial crisis of 2009), typically following excessive expansion of money and credit and an asset price boom. But there have been other triggers: the two oil shocks of the 1970s and the early 1980s sharp tightening of US monetary policy to curb inflation. Looking further back, the short recessions of the late nineteenth century had their origins in the agricultural sector. In 1876, a plague of locusts devastated crops in the newly expanded Midwest of America, for example.
In the current recession, many have expressed surprise at the chasm which has opened up between the behaviour of the stock market and the real economy. The MSCI index of world equities, having dropped by almost one third between the start of the year and 23 March, recouped most of the losses by 1 July. The Nasdaq, with a high representation of technology companies, has reached new highs. Recent price movements appear as a blip on the long-term upward trend in the S&P 500 index.
Stock market: too complacent?
Does this mean the equity market is too complacent in the face of the economic damage caused by Covid-19? There are three reasons for thinking that the market behaviour is reasonable:
The massive scale of the policy response to the crisis
Globally, the reaction of fiscal policy is now estimated at around $11trn. One half of these measures ($5.5trn) is additional spending and forgone revenue, directly affecting government budgets. The remaining half is comprised of various loans, guarantees and equity injections which could add to government debt and deficits in the future if they incur losses. The response has been larger in advanced than in emerging economies. The current fiscal response is around twice the size of that to the 2008/9 global financial crisis. The monetary response saw an initial swift reduction in policy interest rates in the advanced economies followed by substantial asset purchases. Purchases by the major four central banks have already amounted to twice the size of purchases in the global financial crisis and are likely to be at least three times larger. They are planned to continue through 2020 and are set to reach $7.5trn or more by the end of the year.
The very low level of interest rates and bond yields enhances the attractiveness of equities, both from an income-generating and potential growth perspective.
The potentially rapid change to working and business practices as a result of the Covid-19 crisis can be captured by exposure to certain areas of the equity market. Lenin’s comment “There are decades where nothing happens, and there are weeks where decades happen” is applicable in this respect. The emergency arrangements put in place to cope with the crisis could just be temporary. But we think they are set to trigger more fundamental longer-term changes in the way businesses operate, how consumers shop, the nature of business and leisure travel and the means of communication.
In this sense, a return to pre-Covid-19 ways is most unlikely. That means that although there has been some excitement about the possibility of a V-shaped recovery, this seems unlikely to characterise all sectors of the economy. Different areas will be affected in very different ways. On balance, we think the recovery is still more likely to be U- or swoosh-shaped with, respectively, the recovery taking longer to start or slowing down as it progresses.
On the downside, some companies will clearly be fatally damaged. Others will emerge from the crisis in a very different form. There will be notable winners and losers, a trend already reflected in the sectoral performance of global equity markets. At its broadest, technological, virtual communication and e-commerce-based sectors look set to gain as in-person, physical and high street offerings suffer; but the picture will be more nuanced than that.
Next moves: focus turns to US politics
How these changes affect national and global politics will be a key issue in the second half of the year. In the US, attention will turn to the 3 November presidential election. Often, the outcome of such elections can be discerned by looking at the behaviour of key economic indicators (employment and income growth, whether there has been a recession and so on). But such standard analysis may be less fruitful in the post-pandemic world.
Of course, there will be many polls, but these can be unreliable indicators. For example, in June 1988 George H W Bush trailed the Democratic candidate by 12 percentage points but went on to win by eight. In 2016, even polls on the day of the election suggested Hilary Clinton would win. Voting in key swing states will be crucial to the outcome, and trends in those suggest it will be very close.
For those who may tire of the complexities of such political analysis, the behaviour of the stock market has been a perfect predictor of election outcomes since 1984: a rise in the three months before the election has seen the incumbent party win; a fall has seen it lose. In that sense, president Donald Trump will be hoping for the stock market rise to continue until 3 November.
Daniel Murray is global head of research at EFG Asset Management. The views expressed above are his own and should not be taken as investment advice.