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“ ‘The worst for the economy is still to come over the next several months.’ ”
That’s Joachim Fels, Pimco’s global chief economic adviser, painting a rather bleak picture for investors in a note to clients cited by Bloomberg on Sunday.
He said both the U.S. and Europe face the “distinct possibility” of a technical recession in the first half as investors flock to safe havens amid the continuing spread of the coronavirus.
On Sunday night, safe havens were, indeed, looking like the place to be, as futures on the Dow Jones Industrial Average YM00, -4.24% pointed to a nasty decline of more than 1,000 points to start the week, while gold GC00, +1.71% was up almost 2%
Fels said that, assuming the coronavirus outbreak peaks in the next two months, he expects the recession to be short-lived. A recovery could follow in the second half, but he said he’s “concerned about potential cracks in the U.S. credit cycle in an environment of dwindling corporate cash flows, which could lead to a sharp tightening of financial conditions that feeds back into the real economy.”
Meanwhile, he’s looking for more rate cuts by the Federal Reserve, “with a distinct possibility of a return to zero and a resumption of asset purchases.”
Last week, the Fed delivered an emergency half-percentage-point rate cut that failed to provide much relief to a reeling stock market, with at least one investment strategist saying the move “reignited investors’ worst fears.”
Pimco’s Fels said it’s time for investors to ease up on risk assets and “focus on liquidity and capital preservation as central banks have less ammunition to draw from.”
