The Wall Street Journal - 07.03.2020 - 08.03.2020

B12| Saturday/Sunday, March 7 - 8, 2020 **** THE WALL STREET JOURNAL.

When a hurricane rolls in, a

river breaches its levee or sud-

denly shifting tectonic plates

shake the earth, the economy can

experience a big hit. The ensuing

recovery is often even bigger.

But the coronavirus epidemic is

no hurricane. It will weigh on the

U.S. and global economy far lon-

ger, it won’t end with a sudden

burst of blue skies and it won’t

lead to types of rebuilding ef-

forts—there are no roofs to be

reshingled—that have historically

helped the economy bounce back

from natural disasters.

The shape of the economy as it

absorbs and eventually recovers

from the coronavirus epidemic is

more likely to be U-shaped than V-

shaped—with a prolonged bottom.

Ever since the scope of the cor-

onavirus epidemic in Wuhan

started becoming clearer in Janu-

ary, economists have been cutting

their growth forecasts. Early this

year, for example, Deutsche Bank

forecast that U.S. gross domestic

product would grow at a 1.7% an-

nual rate in the first quarter, and

2.2% in the second. Now its econ-

omists are looking for GDP

growth of 0.6% in the first quar-

ter, followed by a 0.6% contrac-

tion in the second.

In the third quarter, they look

for growth to resume, but, says

Deutsche’s global head of eco-

nomic research Peter Hooper,

“there is no question there will be

an overall loss of consumption and

investment activity that does not

come back.”

Like most of his peers, Mr.

Hooper believes the U.S. will skirt

a recession. That is by no means a

given, though. The risk of a down-

turn is very real.

Even without taking into ac-

count the effects of full-scale

spread of the virus in the U.S., it

isn’t difficult to imagine a scenario

where as people avoid things such

as travel and dining out to reduce

risk, businesses cut back on em-

ployment, leading to an adverse

feedback loop that further hurts

spending. Nor is it hard to imagine

that small and midsize businesses

forced to temporarily halt opera-

tions will get pushed to failure.

There are two major ways the

epidemic will affect the economy:

through disruptions to the supply

of goods from China and else-

where, and through the measures

adopted in the U.S. to curtail the

virus’s spread. There is plenty of

uncertainty on both counts.

China’s economy has taken a

severe hit from the aggressive

measures its leaders imposed to

curtail the virus’s spread. Data

such as daily coal consumption

and passenger traffic remain far

below year-earlier levels and,

while there has been some pickup

in business as many provinces

and municipalities have relaxed

restrictions, the country is strug-

gling to get back to work.

That has disrupted global sup-

ply chains, and the U.S. economy is

getting hurt as a result.

The good news is that China’s

actions appear to have worked, or

at least slowed the speed of the

spread, laying the groundwork for

an eventual recovery in activity.

One key question: Will the lifting

of quarantines and other restric-

tions lead to fresh outbreaks in

China? That could make the re-

sumption of Chinese manufactur-

ing uneven.

Moreover, the spread of the vi-

How bad the economic damage

gets will ultimately depend on how

far such social-distancing mea-

sures extend and what types of

measures state and local govern-

ments might adopt to stem coro-

navirus’s spread.

But it is hard to gauge the

scope of such measures as epide-

miologists are struggling to under-

stand some basic facts about the

virus, such as how fatal and trans-

missible it is. The underlying prob-

lem is that nobody knows how

many people have actually been

infected, says Caroline Buckee, an

epidemiologist at the Harvard T.H.

Chan School of Public Health. “We

don’t know how many people have

no symptoms at all, or who have

minor symptoms.”

But it could be awhile before

that information is available.

Meanwhile, Americans may only

become increasingly cautious,

placing spending at further risk.

And absent a vaccine—some-

thing that, if it comes, realisti-

cally won’t be available for quite

some time—signs that the epi-

demic are starting to be con-

tained probably won’t lead to

people, businesses and authorities

to abruptly lower their guards.

Rather, they will continue to en-

gage in many of the cautious be-

haviors that helped arrest the vi-

rus’s spread. Scattered outbreaks

may only reinforce that message.

So there will be no sudden

booking of vacations and no imme-

diate resumption of major busi-

ness conventions.

No V, in other words. The coro-

navirus epidemic will weaken the

economy, and that weakness will

last an uncomfortably long time.

—Justin Lahart

Virus Aftermath Is

Not Like a Hurricane

No roofs to be reshingled; even if recession is avoided,

recovery is likely to be U-shaped and uncomfortably long

Italy’s LuxuryBrands

Face a DoubleThreat

Covid-19 is both a supply and demand problem

Investors were slow to accept

that Chinese demand for luxury

goods is exceptionally weak, even

as coronavirus fears closed brands’

boutiques. Made-in-Italy tags are a

new risk to consider.

All designer brands will see very

weak demand for their goods in

the first quarter of 2020 at least.

Chinese shoppers buy one-third of

luxury products globally and traffic

at stores in mainland China is

down by between 80% and 90% in

some virus-hit locations. Brokerage

Citi expects luxury companies’ rev-

enue to grow by 3% in 2020, the

lowest rate in five years.

But those that manufacture and

source in Italy could be affected

on the supply side too. Italy has

the highest number of Covid-19

deaths outside China. Based on the

latest official statistics available,

148 people have died from the dis-

ease there, with 3,858 cases con-

firmed countrywide. The Italian

government has closed schools

and banned public sporting events

as it tries to contain the epidemic.

Italian brandsTod’sandPrada

do the majority of their produc-

tion domestically, except for goods

that need specific expertise from

elsewhere, such as Swiss watches.

Kering, which owns Gucci and

Bottega Veneta, says that 88% of

its suppliers are based in Italy.

Salvatore Ferragamo’s latest sus-

tainability report shows that 83%

of its handbag and suitcase suppli-

ers are in Tuscany.

Moncleris the exception among

prominent Italian names. The lux-

ury puffer jacket brand moved its

manufacturing to Romania in 2016,

and most of its third-party suppli-

ers are based in Eastern Europe.

Since Italy declared a state of

emergency on the last day of Jan-

uary, the stocks of Italian brand

owners have been among the sec-

tor’s heaviest fallers. Kering,

Prada, Salvatore Ferragamo and

Tod’s are down between 14% and

26%, compared with just 6% and

8%, respectively, for shares in Her-

mès andLVMH Moët Hennessy

Louis Vuitton. These Paris-based

companies arguably own more

powerful brands and should

bounce back quickly once the out-

break is under control, but it also

helps—for now—that they do their

manufacturing in France.

How the stocks move from here

may depend on how the disease

spreads, not just in important lux-

ury-producing regions like Tus-

cany but also across the Italian

border in France. Luxury brands

don’t just need to sell their

wares—they must also be able to

make them.

—Carol Ryan

Outside the Prada store in Galleria Vittorio Emanuele II in Milan.

MAIRO CINQUETTI/ZUMA PRESS

For Banks, Bad Times

Can Be Especially Bad

American banks’ shares are per-

forming twice as poorly as the mar-

ket. So much for diversification.

As banks continued to rise

throughout 2019, even as interest

rates tumbled, the talk was of their

success in diversifying their busi-

nesses. Falling interest rates cer-

tainly hurt, but banks seemed to

always have something to offset it,

ranging from a boost to trading

desks, mortgage-refinancing vol-

umes, buoyant credit cards or a

shift from cash into securities.

One way to measure this confi-

dence was to see banks’ forward

price-to-earnings ratio advance rel-

ative to the S&P 500 in the latter

part of 2019. They grew from 0.57

times the multiple of the S&P 500

overall in August to 0.67 times by

December, according to FactSet.

“Rates schmates,” the market

seemed to say.

But now that faith has evapo-

rated with the coronavirus-inspired

yield collapse. S&P 500 banks’ rela-

tive forward multiple has collapsed,

falling to its lowest level relative to

the broader index since 2000. In

price terms, S&P 500 banks are

down 23.3% in the past month; the

index is down 11.2%. Despite banks’

higher capital levels and efforts to

shift into steadier businesses, the

lesson appears to be that markets

still judge them to be much more

at risk than other companies in an

economic downturn.

These risks should have been

more on investors’ minds last year.

A quick inventory of banks’ chal-

lenges in a low-rate and slow-

growth scenario reveals little up-

side. Yes, trading desks can benefit

from volatility when rates change.

Yet in a truly wild market, some-

times called “bad volatility,” banks

more often lose out. Take Decem-

ber 2018, the last correction: It

was a horrible quarter for banks’

trading desks.

Lower rates will spark more

people to refinance mortgages or

buy homes, generating mortgage-

banking fees. Banks also tend to

hedge out mortgage-rate risk in

various ways. But associated fees

may be offset by rising prepay-

ment speeds and the resulting im-

pact on the accounting value of

mortgage-servicing rights and

mortgage-backed securities.

The coronavirus offers some

SteepBank

Shares of big lenders in the S&P 500

have plunged much faster than the

broader market.

Indexperformance,pastsixmonths

Source: FactSet

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S&P 500 banks S&P 500

PHOTO ILLUSTRATION BY WSJ, ISTOCK (2)

rus to other countries making

goods the U.S. depends upon, such

as South Korea, is only making

supply-chain problems worse.

Shortages of key manufacturing

components as well as finished

goods could be a persistent prob-

lem for American businesses, sap-

ping the strength of any recovery.

The other big way the virus will

affect the economy is through how

people respond to its threat. Al-

ready, people are canceling travel

plans and avoiding gatherings.

‘There will be an overall

loss of consumption and

investment activity that

does not come back.’

OVERHEARD

Wells Fargo & Co. created

perhaps millions of fake cus-

tomer accounts. Three-and-a-half

years after that revelation, the

scandal seems to be generating

nearly as many news releases.

As the bank’s leadership pre-

pares to testify before the

House Financial Services Com-

mittee next week, everyone in-

volved is scrambling to get the

first word in.

The Democrats on the com-

mittee, led by California’s Max-

ine Waters, started the party

Wednesday by dropping a 113-

page report alleging the bank

mismanaged its obligations to

regulators. Cementing Wells

Fargo’s status as a bipartisan

punching bag, the Republicans

on the committee released their

own 148-page report on the

bank’s misdeeds Thursday night.

The Office of the Comptroller

of the Currency, the bank’s main

regulator, responded to the

Democrats’ report by bashing

the bank for its “failure to

promptly correct identified defi-

ciencies,” but offered a bit of

support for Chief Executive

Charles Scharf.

Wells Fargo, meanwhile, has

been putting in time touting its

bona fides. It said (in three lan-

guages) that it plans to provide

credit products for recipients of

the Deferred Action for Child-

hood Arrivals program. It also

said it plans to lift its minimum

pay and it introduced a new no-

overdraft fee bank account.

It is unclear whether there

will be anything left to say by

the time the hearings start.

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

unique additional challenges.

Cash might flee to banks in the

form of deposits, keeping funding

cheap. That is good when low

rates are helping spark loan

growth. But if companies and con-

sumers also stop borrowing, or

are borrowing only to stave off li-

quidity problems, banks face the

prospect of either adding low-

quality assets or pushing yields

further down by buying bonds in-

stead of lending.

A slowdown in business and

travel spending may hit credit-card

revenue for banks hard; many have

key card partnerships with airlines

and hotels. Cross-border business

payments may also be in for a

rough time as companies halt ac-

tivity. Revenue from financing

shipping and trade already looks

vulnerable.

None of this is to say that banks

are necessarily doing a bad job at

being banks. The risk of bank fail-

ure remains remote, and stronger

banks likeJPMorgan Chasemay

have the resources to take advan-

tage of others’ struggles to ride

out the storm and grab market

share to boost future returns.

But banks are still banks. Despite

the many things that have changed

about the industry, the fact remains

that, over a full cycle, bad times

can be especially bad for them.

—Telis Demos WELLS FARGO: PHOTO ILLUSTRATION BY WSJ, BLOOMBERG NEWS, ISTOCK