The Swedish experiment may prove this assumption wrong. Although be careful. Sweden is not as laissez-faire as some suppose. Its lockdown intensity (largely self-enforced on the trust principle) is 41pc, v 54pc in the US, 60pc in Germany, 68pc in the UK,or 90pc in Spain, on the Oxford model, and it may be better designed. There again, we have not heard the end of the Swedish story. Charles XII at Poltava comes to mind.
Basically it is nigh impossible to avoid fresh outbreaks until the RO spread rate falls far below 1.0 – or probably nearer 0.4 – and stays there long enough to whittle down the stock of infections. Only then is it plausible to manage the pandemic with Korean-style testing, tracing, and isolating, with no need for further lockdowns.
Several German Lander are unwinding containment measures too fast – to the irritation of Angela Merkel – even though the national RO rate has been rising from 0.7, to 0.8, to 0.9, to 1.0. The full surveillance and tracking regime is not in place even in Germany. Public discipline is breaking down.
For now markets are pricing in a successful ‘one-and-done’ triumph over Covid-19. The Nasdaq index is a whisker shy of its all-time high. The S&P 500 is back where it was last August as if nothing much has happened in the meantime.
The rally could go further yet. Traders and leveraged funds have so far unwound just a fraction of their short positions on equity ETFs and the futures markets.
But the former bulls at JP Morgan have a warning. The economic shock has done fundamental damage to corporate income flows that cannot be wished away. The Fed, ECB, and the Bank of England can flush the system with liquidity and backstop the debt markets – up to a point – but they cannot conjure solvency out of thin air when the real economy is contracting.
Even in the best case, corporate balance sheets have to be rebuilt. Consensus estimates for US earnings this year have been slashed from plus 3.7pc to minus 14pc. This shrinking base has pushed the current multiple on the S&P 500 to 18.2. It is back to the frothy levels of the previous peak. “And these multiples are still based on what are likely highly overstated earnings,” it says.
The bank expects global profits to crash by 72pc. Companies will stay alive by taking on debt backed by emergency state guarantees. That is vastly better than mass bankruptcy but it is not a return to the status quo ante. The debt burden is a ball and chain. Capex spending will languish. Earnings will still be 20pc below pre-pandemic estimates by the end of 2021.
Graham Secker from Morgan Stanley says profits in Europe will fall 45pc this year and will not regain the lost ground until 2023. That is a corporate depression. Markets are being very brave preferring to ‘look through’ the real economic destruction this quarter to sunlit uplands ahead.
This grim picture assumes nothing goes badly wrong over the coming months. It assumes that the most acute macroeconomic shock for over a century – or indeed, ever recorded – does not set off all kinds of dangerous feedback loops.
Morgan Stanley’s Jacob Nell and Joao Almeida estimate that eurozone GDP will contract by 11pc this year even under its central base case, rising to 12-13pc for Greece, Spain, and Portugal, and a 15pc for Italy. That is three times the shock from the global financial crisis. Not even the awful year of 1931 in the Great Depression matched this.