The S&P 500 (^GSPC) has been reset to where it was in the fall, and people are nervous.
Analysts have speculated about what will happen next, and a note from Morgan Stanley succinctly points to three scenarios globally.
The first scenario: Things get better by March, production is restarted in China, and the disruption is contained to the first quarter. In this scenario, U.S. economic growth dips to 2.5% in the first half of the year but picks up, the research analysts wrote.
The second scenario? Escalation and more disruption in the second quarter. In this case, the virus peaks in May, growth in the first half of 2020 goes to 2.4% – the weakest since the financial crisis – and third quarter sees things picking back up.
The worst and third scenario: The virus persists into the Q3. This scenario, analysts wrote, would escalate the risk of a recession. It would affect all large economies. Corporate profits get hit hard and credit risk for corporations spikes. In Europe, scenario 3 would cause an “outright recession,” according to the analysts. China would see growth of 6.1% in Q1 and the U.S. would have a “soft pickup.”
In the U.S., there would also be a temporary rise in unemployment of almost 200 basis points, or 2 percentage points. The Fed would keep cutting rates, and aggressively in 0.5 percentage point increments.
For this scenario, no medical solution would be in place yet, though there’s currently a drug in trials from Gilead (GILD) that could stop transmissions.
The most likely scenario right now
According to Morgan Stanley, we are trending toward the second scenario right now.
“Recent developments mean that we are moving towards scenario 2,” they wrote.
If things continue, they expect the already accommodative central banks and monetary policies to be easing and measures for near-term relief to materialize. But the analysts note that they see the Covid-19 crisis as an “exogenous shock” (external shock) that isn’t related to an economic slowdown caused by an overheated economy.
“We remain of the view that the recovery is being delayed but not derailed,” the Morgan Stanley analysts wrote.
What to watch for now? The analysts point to how Italy and South Korea deal with and contain the outbreaks, the spread in Europe and the U.S., and whether therapies emerge to deal with the virus.