Wells Fargo: Our short-term outlook (through June 2020)

We are now seeing the third wave of the coronavirus. The first wave was in China’s Hunan province, which remains the epicenter of the disease. The second wave was broader China. The third wave is around the world, focused primarily in Europe, the Middle East, and South Asia.
The progression of the disease shows that it can be contained: According to data collected by Johns Hopkins University, China currently has 80,556 cases confirmed, but the number of recovered people went from 18,200 on February 20 to 55,700 on March 6, while the number of new cases rose by only 5,556 over the same period.1
Yet, until we can see the peak in cases outside of China, global equities are likely to retest lows from summer 2019 (2850 on the S&P 500 Index). If recession risk increases, the next support for equities could be the lows from early 2018 (2600 on the S&P 500).
The coronavirus crisis is unlike most economic shocks. The virus both crimps and slows the flow of goods around the world, and it slows buying as people join quarantines.
We believe the U.S. economy will avoid a recession, but some additional slowing is likely. We have lowered our U.S. and international economic and earnings forecasts accordingly. Additional changes – higher or lower – will depend on the spread of the virus.
Stimulus may boost confidence but will require time to work and should be appropriate.
One risk is that policymakers may not manage market expectations properly around the size and timing of stimulus. Markets are building expectations for stimulus, and any disappointment could add to risk aversion.
Coordinating stimulus across countries could support global trade, but these efforts so far are missing.
Another risk is that companies with riskier balance sheets may find more difficulty extending their credit lines. Federal Reserve and fiscal policy could help by targeting low-cost loans to businesses most directly affected, creating a holiday from payroll taxes, and directing spending into the economy. However, these measures have limitations. They take time to work and they treat the economic symptoms of the disease; they do not, by themselves, stop the spread of the disease.