Answers to 10 common questions on COVID-19, Oil whether containment triggers a record-brief technical recession (two quarters) or a longer fundamental one (three or more quarters); the effectiveness of monetary and fiscal stimulus in stabilizing markets absent an effective public health response; what macro scenario is discounted in market valuations and investor positioning; and what long-term after effects these crises will create to challenge policymakers and markets in 2021. Because a risk scenario has been to think of shocks as delivering a technical recession at worst, portfolio recommendations have kept a moderate overweight of Equities versus Fixed Income but attempted to reduce beta to the business cycle by funding Equities with Credit, by owning some duration (in EMs) and by owning USD and JPY versus other currencies. There is a case for averaging more into cyclicals on a view that risk premia are high and a multi- quarter growth/earnings contraction unlikely, but the patchy public health response in some countries argues for patience. Source: J.P. Morgan Mean reversion reasserts itself via a forgettable 2018, extraordinary 2019 and terrible 2020 2020 total returns versus 2019 and long-run average -24% -18% -12% -6% 0% 6% 12% 18% 24% 30% 36% GBI 3M cash USD 3M Cash US Treasuries Bunds JBGs GBI Global (lcy) US HG US HY US Lev Loans Euro HG Euro HY EM Sovereign EM Corporates EM Local Bonds Commodities US linkers (TIPS) USD trade-wtd EM FX MSCI World S (2) recession-like pricing in financial markets to accommodate grim newsflow; and (3) a reversal in investor positioning from Januarys widespread overweights to neutrals or underweights. The last two conditions have mostly been met but the first has not. In an environment of diminishing returns to DM central bank easing because rates are near the effective lower bound, fiscal easing would need to be considerable (maybe 1% of GDP) to allow markets to rally sustainably if infection rates are still accelerating 2 Answers to 10 common questions (part 1) 1. When will COVID-19 peak? (slides 3-4) A peak then slowdown in the daily infection rate to low single digits is more important for markets than a peak in the total number of infections, because the rate is what allows investors to project an end to the containment measures driving the growth/earnings downgrades. Chinas infection rate fell to 1% about two months after the initial outbreak, but only after the strictest lockdown in modern history. Other countries have been slower to announce lockdown or have opted for either targeted or voluntary measures, which is why infection rates might not slow sufficiently until April/May. 2. Will the virus trigger a GDP and/or earnings recession? (slides 5-6) Technical recessions are just two consecutive quarters of negative GDP growth. One-quarter contractions are common due to epidemics, natural disasters and climate events. It is easy to envision a two-quarter contraction if containment measures put in place in Q1 must extend to Q2 in order to slow infection rates. Earnings recessions (2015) and earnings stagnation (2018) can occur without GDP recessions. The US has never experienced a contraction of just two quarters. When the economy contracts, it does so for three to eight quarters due to underlying imbalances in the household and/or corporate sector that require much more time to correct. The US economy doesnt exhibit such large imbalance across the private sector currently. Also, the nature of the primary shock (a respiratory virus) seems inherently more seasonal that previous shocks. So a technical recession is a reasonable scenario but a fundamental one that extends for several quarters is not. 3. Can monetary/fiscal easing prevent a recession? (slide 8) Monetary and sometimesfiscal easing have always been part of the rebalancing process for economies and stabilizationfor markets. But the first moves are rarely sufficient to turn growth, earnings and asset prices if underlying adjustment hasnt occurred in the economy, if valuationsdont reflect a decent risk premium for recession and if investor positionshavent shifted from overweight to underweight cyclical assets. Every crisis is different from previous ones in some ways. Since the current one intertwines a public health problem with an overcapacity issue in energy markets, monetary and fiscal easing will support growth eventually but arent sufficient now. The public health response must be broad and strong enough to contain the outbreak within a short window (a few months) and thus allow activity to start normalizing this spring. 4. How low can Oil go, and shouldnt a price collapse stimulate growth and support cyclicals? (slide 9) A global oil market that is oversuppliedby 2mbd can trigger a price drop of 60% yoy, implying risk of a dip to high $20s. A lower oil price boosts consumptioneventually by transferring income from a few countries (oil producers) to the rest of the world with a higher ma