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C-Suite Advisory

Fear still hunts Wall Street

Covid-19 continues to spread fear and volatility in the financial markets, it feels endless at the moment, though one day, it will end.

When I first considered how negative the stock markets would react to the Covid-19 over a month ago, I didn’t include a price war in the oil market in my assessment. If somebody for had asked me then whether I believed that large oil producing countries would initiate an aggressive price war in a market with a strongly rising oversupply, then I would never have thought it to be possible. But as seen so often before, reality turned out to be different compared to the expectation, and the result was an unusually big and steep dive in the oil price, as shown in graphic one.

Combined with the negative market reactions from the price war in the oil market, one could in retrospect, argue for a total drop of 20 to 25 pct. in the US stock market, as stocks were trading at a very high level ahead of the Covid-19 outbreak. I argued that the virus could provoke a 15 drop, but since then, Wall Street touched a low of minus 35 pct.

But my view from just 1½ months ago included an argument, or precondition, that I didn’t imagine would turn out to be of very high importance.

I argued that my biggest fear was not the virus as such, but the precautions that the governments would introduce. At that time, I argued that governments should cover all costs in the economies as a result of whatever type of precaution will be taken by governments or public institutions in the Covid-19 fight.

My concern was that precautions taken with only partial economic compensation, or maybe even none, could easily lead to economic havoc, and I argued that it was with good reason why governments should include economic sensibility in their solutions. In that context, it was truly unimaginable to me that even Western governments could lock down whole economies, more so in a very quick manner.

Because governments have responded so vigorously, it’s not surprising that many people around the world consider Covid-19 as the biggest threat since World War II. This has created a situation where almost all 7.8 billion people on the planet are afraid of the virus, so it is no wonder that the global economy is stopping for several reasons.

Many often look for comparisons to prior crises, but each crisis also has its own inertia, or new features so to say, with the social medias (SoMe) playing a completely different role this time, compared to prior crises.

My assessment is that the SoMe effect is now an outright volatility-enhancing element, with the best example being Facebook, which in 2008, had 0.1 billion users and now has 2.5 billion users.  That’s 25x more users than the last crisis. With virtually the whole world being nervous to some extent, I argue that this fear is further exacerbated by the SoMe effect.

About the Covid-19 situation, my main scenario is that a vaccine will be developed. A general assumption is that it might take another 12 months before it is ready, but Johnson & Johnson will already test their vaccine in September, and the company trusts they have a vaccine ready for the market in early 2021. Thus, the company joins in the competition against the other heavy pharmaceutical players such as Sanofi, GSK and Pfizer. Biotech company Mordena, began testing their vaccine last month, and even the British American Tobacco Company claims to have a vaccine ready by June.

In parallel, a number of attempts are being made to alleviate the course of a disease on infected patients. The most famous drug is probably chloroquine against malaria, but a tuberculosis drug is also being tested, and Germany has reportedly bought several million packages of Avigan, used in Japan against the flu.

This race for solutions is happening quite quickly, though I do not think that this has been given any positive weight in the financial markets yet. More importantly, the medical developments will, at some point, lower the general fear of the population and the SoMe effect will reverse, with a myriad of positive stories gaining dominance on social media- if a medical solution is developed.

However, this does not change the fact that the many shutdowns of countries are simply equivalent to a daily value destruction which must be corrected for in the stock market. Some Emerging Markets countries will have a hard time, but I am more concerned about how investors will respond to a possible increase in the spread of infection when some countries start to reopen again. In addition, bad news from the US can hit the financial markets in the coming two to three weeks, but fundamentally, one should not underestimate some of the positive elements in the US economy.

Prior to the Covid-19 crisis, private consumption was quite robust. This was due to the strong labour market, though I recognize that many people are losing their jobs right now in the US. Hopefully, many will get help via the government’s aid package, but most jobs are lost in the service sector, though I expect this sector to recover pretty quickly. Moreover, interest rates are low, gasoline prices are low, and households are significantly less indebted than in the past, which is shown in graphic two. The same can be observed in the household debt as percentage of GDP, which at the start of the global financial crisis in 2008 was approximately 100 pct. of the American GDP but is now only 76.3 pct. of GDP.

This situation is twofold because the development also includes a growth in low-paid jobs. For these employees, the pay does not provide sufficient household income to generate a credit rating that is strong enough to get a loan. Though the main conclusion from graphic two is that many American household debt/equity ratios are significantly better than in typical times of crises. Thus, there are very good conditions for a private consumption jump in the US once the American economy is back on track again.

These are positive elements that I do not believe are priced in the financial markets. But the time until they start to play a role can drag out, and the nervousness can, for the meantime develop to renewed fear, or maybe even panic in the financial markets. Therefore, if one decides to stay with the current risk in the portfolio, or even increase it, one should also have a clear opinion about at which levels to reduce the risk again, as everything can still happen in the financial markets.


Graphic one: Crude oil Price per barrel Brent in US dollars

Crude oil Price per barrel Brent in US dollars

DateCrude oil Price
2019-04-01 00:00:0069.08
2019-04-02 00:00:0069.68
2019-04-03 00:00:0069.21
2019-04-04 00:00:0069.8
2019-04-05 00:00:0069.93
2019-04-08 00:00:0071.12
2019-04-09 00:00:0071.02
2019-04-10 00:00:0071.63
2019-04-11 00:00:0071.3
2019-04-12 00:00:0071.57
2019-04-15 00:00:0070.9
2019-04-16 00:00:0070.74
2019-04-17 00:00:0071.14
2019-04-18 00:00:0070.71
2019-04-22 00:00:0070.71
2019-04-23 00:00:0074.39
2019-04-24 00:00:0073.59
2019-04-25 00:00:0074.94
2019-04-26 00:00:0071.03
2019-04-29 00:00:0071.22
2019-04-30 00:00:0072.19
2019-05-01 00:00:0072.01
2019-05-02 00:00:0070.56
2019-05-03 00:00:0071.95
2019-05-06 00:00:0071.95
2019-05-07 00:00:0070.98
2019-05-08 00:00:0071.09
2019-05-09 00:00:0070.61
2019-05-10 00:00:0071.63
2019-05-13 00:00:0072.35
2019-05-14 00:00:0072.53
2019-05-15 00:00:0073.09
2019-05-16 00:00:0074.7
2019-05-17 00:00:0073.94
2019-05-20 00:00:0073.21
2019-05-21 00:00:0072.94
2019-05-22 00:00:0071.94
2019-05-23 00:00:0068.37
2019-05-24 00:00:0067.98
2019-05-28 00:00:0070.19
2019-05-29 00:00:0070.64
2019-05-30 00:00:0069.55
2019-05-31 00:00:0066.78
2019-06-03 00:00:0063.16
2019-06-04 00:00:0063.56
2019-06-05 00:00:0062.14
2019-06-06 00:00:0062.77
2019-06-07 00:00:0064.1
2019-06-10 00:00:0064.31
2019-06-11 00:00:0063.56
2019-06-12 00:00:0061.66
2019-06-13 00:00:0063.28
2019-06-14 00:00:0063.13
2019-06-17 00:00:0062.56
2019-06-18 00:00:0063.35
2019-06-19 00:00:0062.85
2019-06-20 00:00:0065.44
2019-06-21 00:00:0065.99
2019-06-24 00:00:0065.16
2019-06-25 00:00:0066.24
2019-06-26 00:00:0066.85
2019-06-27 00:00:0066.78
2019-06-28 00:00:0067.52
2019-07-01 00:00:0065.1
2019-07-02 00:00:0062.72
2019-07-03 00:00:0063.53
2019-07-04 00:00:0063.62
2019-07-05 00:00:0064.23
2019-07-08 00:00:0064.89
2019-07-09 00:00:0064.3
2019-07-10 00:00:0066.41
2019-07-11 00:00:0067.64
2019-07-12 00:00:0066.65
2019-07-15 00:00:0066.86
2019-07-16 00:00:0065.87
2019-07-17 00:00:0063.67
2019-07-18 00:00:0060.7
2019-07-19 00:00:0061.04
2019-07-22 00:00:0061.96
2019-07-23 00:00:0062.28
2019-07-24 00:00:0063.83
2019-07-25 00:00:0063.47
2019-07-26 00:00:0062.46
2019-07-29 00:00:0062.29
2019-07-30 00:00:0062.55
2019-07-31 00:00:0064.07
2019-08-01 00:00:0062.9
2019-08-02 00:00:0061.12
2019-08-05 00:00:0059.32
2019-08-06 00:00:0058.63
2019-08-07 00:00:0055.03
2019-08-08 00:00:0056.29
2019-08-09 00:00:0057.37
2019-08-12 00:00:0057.13
2019-08-13 00:00:0059.9
2019-08-14 00:00:0057.86
2019-08-15 00:00:0057.37
2019-08-16 00:00:0059
2019-08-19 00:00:0059.79
2019-08-20 00:00:0059.03
2019-08-21 00:00:0060.6
2019-08-22 00:00:0059.81
2019-08-23 00:00:0058.64
2019-08-26 00:00:0058.64
2019-08-27 00:00:0058.44
2019-08-28 00:00:0060.42
2019-08-29 00:00:0060.59
2019-08-30 00:00:0061.04
2019-09-02 00:00:0058.55
2019-09-03 00:00:0057.93
2019-09-04 00:00:0060.68
2019-09-05 00:00:0062.7
2019-09-06 00:00:0061.28
2019-09-09 00:00:0063.99
2019-09-10 00:00:0064.67
2019-09-11 00:00:0063.02
2019-09-12 00:00:0060.76
2019-09-13 00:00:0061.25
2019-09-16 00:00:0068.42
2019-09-17 00:00:0065.59
2019-09-18 00:00:0064.29
2019-09-19 00:00:0064.25
2019-09-20 00:00:0065.23
2019-09-23 00:00:0064.66
2019-09-24 00:00:0064.13
2019-09-25 00:00:0062.41
2019-09-26 00:00:0062.08
2019-09-27 00:00:0062.48
2019-09-30 00:00:0060.99
2019-10-01 00:00:0060.06
2019-10-02 00:00:0057.92
2019-10-03 00:00:0058.01
2019-10-04 00:00:0059.13
2019-10-07 00:00:0059.46
2019-10-08 00:00:0058.14
2019-10-09 00:00:0059.7
2019-10-10 00:00:0059.08
2019-10-11 00:00:0060.59
2019-10-14 00:00:0058.81
2019-10-15 00:00:0059.19
2019-10-16 00:00:0059.3
2019-10-17 00:00:0059.35
2019-10-18 00:00:0059.96
2019-10-21 00:00:0058.95
2019-10-22 00:00:0060.5
2019-10-23 00:00:0060.52
2019-10-24 00:00:0061.71
2019-10-25 00:00:0062.06
2019-10-28 00:00:0060.39
2019-10-29 00:00:0061.05
2019-10-30 00:00:0060.22
2019-10-31 00:00:0059.3
2019-11-01 00:00:0060.17
2019-11-04 00:00:0062.52
2019-11-05 00:00:0062.72
2019-11-06 00:00:0062.11
2019-11-07 00:00:0062.6
2019-11-08 00:00:0062
2019-11-11 00:00:0062.58
2019-11-12 00:00:0062.19
2019-11-13 00:00:0062.27
2019-11-14 00:00:0062.46
2019-11-15 00:00:0063.32
2019-11-18 00:00:0062.82
2019-11-19 00:00:0062.37
2019-11-20 00:00:0063.8
2019-11-21 00:00:0064.99
2019-11-22 00:00:0064.83
2019-11-25 00:00:0064.67
2019-11-26 00:00:0064.82
2019-11-27 00:00:0065.03
2019-11-28 00:00:0064.68
2019-11-29 00:00:0064.5
2019-12-02 00:00:0063.2
2019-12-03 00:00:0062.95
2019-12-04 00:00:0065.25
2019-12-05 00:00:0065.67
2019-12-06 00:00:0066.5
2019-12-09 00:00:0066.44
2019-12-10 00:00:0066.57
2019-12-11 00:00:0065.37
2019-12-12 00:00:0066.67
2019-12-13 00:00:0067.44
2019-12-16 00:00:0068.04
2019-12-17 00:00:0068.99
2019-12-18 00:00:0069.12
2019-12-19 00:00:0069.7
2019-12-20 00:00:0068.66
2019-12-23 00:00:0067.49
2019-12-24 00:00:0069.26
2019-12-26 00:00:0069.26
2019-12-27 00:00:0068.91
2019-12-30 00:00:0068.3
2019-12-31 00:00:0067.77
2020-01-02 00:00:0067.05
2020-01-03 00:00:0069.08
2020-01-06 00:00:0070.25
2020-01-07 00:00:0068.74
2020-01-08 00:00:0067.31
2020-01-09 00:00:0066.58
2020-01-10 00:00:0066.77
2020-01-13 00:00:0064.14
2020-01-14 00:00:0064.45
2020-01-15 00:00:0063.29
2020-01-16 00:00:0064.63
2020-01-17 00:00:0064.05
2020-01-20 00:00:0064.63
2020-01-21 00:00:0063.66
2020-01-22 00:00:0062.11
2020-01-23 00:00:0061.26
2020-01-24 00:00:0059.34
2020-01-27 00:00:0058.54
2020-01-28 00:00:0059.37
2020-01-29 00:00:0059.46
2020-01-30 00:00:0057.72
2020-01-31 00:00:0057.77
2020-02-03 00:00:0054
2020-02-04 00:00:0053.9
2020-02-05 00:00:0055.36
2020-02-06 00:00:0055.18
2020-02-07 00:00:0054.53
2020-02-10 00:00:0053.39
2020-02-11 00:00:0054
2020-02-12 00:00:0055.54
2020-02-13 00:00:0056.34
2020-02-14 00:00:0057.37
2020-02-17 00:00:0057.83
2020-02-18 00:00:0057.35
2020-02-19 00:00:0059.72
2020-02-20 00:00:0059.72
2020-02-21 00:00:0058.6
2020-02-24 00:00:0056.04
2020-02-25 00:00:0056.71
2020-02-26 00:00:0054.96
2020-02-27 00:00:0052.19
2020-02-28 00:00:0051.31
2020-03-02 00:00:0052.52
2020-03-03 00:00:0052.24
2020-03-04 00:00:0051.86
2020-03-05 00:00:0051.29
2020-03-06 00:00:0045.6
2020-03-09 00:00:0035.33
2020-03-10 00:00:0035.57
2020-03-11 00:00:0034.45
2020-03-12 00:00:0031.02
2020-03-13 00:00:0032.25
2020-03-16 00:00:0027.98
2020-03-17 00:00:0027.97
2020-03-18 00:00:0022.79
2020-03-19 00:00:0023.98
2020-03-20 00:00:0025.55
2020-03-23 00:00:0021.85
2020-03-24 00:00:0024.5
2020-03-25 00:00:0025.62
2020-03-26 00:00:0023.55
2020-03-27 00:00:0022.39
2020-03-30 00:00:0019.07

Graphic two: USA Household debt as pct. of disposal income

USA Household Debt In US dollars

DateUSA Household debt
1980-01-01 00:00:0015.419559
1980-04-01 00:00:0015.50613
1980-07-01 00:00:0015.26232
1980-10-01 00:00:0015.088144
1981-01-01 00:00:0015.138376
1981-04-01 00:00:0015.32487
1981-07-01 00:00:0015.18066
1981-10-01 00:00:0015.322148
1982-01-01 00:00:0015.425925
1982-04-01 00:00:0015.495569
1982-07-01 00:00:0015.418619
1982-10-01 00:00:0015.426242
1983-01-01 00:00:0015.39366
1983-04-01 00:00:0015.416808
1983-07-01 00:00:0015.394973
1983-10-01 00:00:0015.420396
1984-01-01 00:00:0015.425305
1984-04-01 00:00:0015.540898
1984-07-01 00:00:0015.691755
1984-10-01 00:00:0015.929233
1985-01-01 00:00:0016.369068
1985-04-01 00:00:0016.474531
1985-07-01 00:00:0016.885492
1985-10-01 00:00:0017.066061
1986-01-01 00:00:0017.064555
1986-04-01 00:00:0017.183377
1986-07-01 00:00:0017.330634
1986-10-01 00:00:0017.539071
1987-01-01 00:00:0017.394269
1987-04-01 00:00:0017.600464
1987-07-01 00:00:0017.419134
1987-10-01 00:00:0017.242252
1988-01-01 00:00:0017.145897
1988-04-01 00:00:0017.082064
1988-07-01 00:00:0016.997349
1988-10-01 00:00:0016.849392
1989-01-01 00:00:0016.792459
1989-04-01 00:00:0016.976871
1989-07-01 00:00:0017.053178
1989-10-01 00:00:0017.007589
1990-01-01 00:00:0016.900919
1990-04-01 00:00:0016.875752
1990-07-01 00:00:0016.888249
1990-10-01 00:00:0016.960268
1991-01-01 00:00:0016.960137
1991-04-01 00:00:0016.818953
1991-07-01 00:00:0016.703078
1991-10-01 00:00:0016.479746
1992-01-01 00:00:0016.160733
1992-04-01 00:00:0015.971127
1992-07-01 00:00:0015.826784
1992-10-01 00:00:0015.752581
1993-01-01 00:00:0015.673178
1993-04-01 00:00:0015.593555
1993-07-01 00:00:0015.669738
1993-10-01 00:00:0015.641764
1994-01-01 00:00:0015.690103
1994-04-01 00:00:0015.761009
1994-07-01 00:00:0015.914829
1994-10-01 00:00:0015.99562
1995-01-01 00:00:0016.198637
1995-04-01 00:00:0016.411955
1995-07-01 00:00:0016.52922
1995-10-01 00:00:0016.572483
1996-01-01 00:00:0016.558361
1996-04-01 00:00:0016.557834
1996-07-01 00:00:0016.606741
1996-10-01 00:00:0016.664822
1997-01-01 00:00:0016.631998
1997-04-01 00:00:0016.653272
1997-07-01 00:00:0016.64924
1997-10-01 00:00:0016.548342
1998-01-01 00:00:0016.32527
1998-04-01 00:00:0016.305444
1998-07-01 00:00:0016.275289
1998-10-01 00:00:0016.349509
1999-01-01 00:00:0016.422021
1999-04-01 00:00:0016.602381
1999-07-01 00:00:0016.727171
1999-10-01 00:00:0016.658897
2000-01-01 00:00:0016.532775
2000-04-01 00:00:0016.659046
2000-07-01 00:00:0016.806757
2000-10-01 00:00:0017.057136
2001-01-01 00:00:0017.146412
2001-04-01 00:00:0017.419544
2001-07-01 00:00:0017.298341
2001-10-01 00:00:0017.701544
2002-01-01 00:00:0017.40731
2002-04-01 00:00:0017.275861
2002-07-01 00:00:0017.304962
2002-10-01 00:00:0017.225365
2003-01-01 00:00:0017.1778
2003-04-01 00:00:0017.056227
2003-07-01 00:00:0016.82049
2003-10-01 00:00:0016.900328
2004-01-01 00:00:0016.881236
2004-04-01 00:00:0016.777059
2004-07-01 00:00:0016.896348
2004-10-01 00:00:0016.845924
2005-01-01 00:00:0017.257222
2005-04-01 00:00:0017.252951
2005-07-01 00:00:0017.315921
2005-10-01 00:00:0017.263161
2006-01-01 00:00:0017.248015
2006-04-01 00:00:0017.364252
2006-07-01 00:00:0017.524214
2006-10-01 00:00:0017.664837
2007-01-01 00:00:0017.700452
2007-04-01 00:00:0017.823646
2007-07-01 00:00:0017.988108
2007-10-01 00:00:0018.132258
2008-01-01 00:00:0018.041124
2008-04-01 00:00:0017.608562
2008-07-01 00:00:0017.810836
2008-10-01 00:00:0017.869616
2009-01-01 00:00:0017.925562
2009-04-01 00:00:0017.523782
2009-07-01 00:00:0017.446098
2009-10-01 00:00:0017.145233
2010-01-01 00:00:0016.820575
2010-04-01 00:00:0016.425608
2010-07-01 00:00:0016.225237
2010-10-01 00:00:0016.079243
2011-01-01 00:00:0015.872126
2011-04-01 00:00:0015.826647
2011-07-01 00:00:0015.738363
2011-10-01 00:00:0015.635514
2012-01-01 00:00:0015.34203
2012-04-01 00:00:0015.19858
2012-07-01 00:00:0015.314373
2012-10-01 00:00:0014.886383
2013-01-01 00:00:0015.44666
2013-04-01 00:00:0015.358474
2013-07-01 00:00:0015.326892
2013-10-01 00:00:0015.360269
2014-01-01 00:00:0015.24077
2014-04-01 00:00:0015.169139
2014-07-01 00:00:0015.154631
2014-10-01 00:00:0015.186816
2015-01-01 00:00:0015.340219
2015-04-01 00:00:0015.384047
2015-07-01 00:00:0015.476221
2015-10-01 00:00:0015.520657
2016-01-01 00:00:0015.52321
2016-04-01 00:00:0015.656994
2016-07-01 00:00:0015.726129
2016-10-01 00:00:0015.694672
2017-01-01 00:00:0015.571108
2017-04-01 00:00:0015.560202
2017-07-01 00:00:0015.52581
2017-10-01 00:00:0015.414625
2018-01-01 00:00:0015.180891
2018-04-01 00:00:0015.125889
2018-07-01 00:00:0015.090032
2018-10-01 00:00:0015.12263
2019-01-01 00:00:0015.070962
2019-04-01 00:00:0015.067404
2019-07-01 00:00:0015.065004
2019-10-01 00:00:0015.084147

Written by Peter Lundgreen. Have you read?
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Peter Lundgreen
Peter Lundgreen is the founding CEO of Lundgreen’s Capital, the leading independent advisor to Danish municipalities. He is armed with a solid 30-year experience in the finance industry and has been sharing his financial and economic know-how through finance advisory over the past decades. Although based in Denmark, Peter’s expertise transcends the European financial zone and market as he was able to successfully create a high level of proficiency and competency over major global economies and financial markets, particularly in China. Peter Lundgreen is an opinion columnist for the CEOWORLD magazine. Follow him on LinkedIn.