A lot is happening in response to the spread of the coronavirus. As you all know, many of us are in lock-down, working from home and hoping that these actions help “flatten the curve” on the spread of the virus.
Moves by the Federal and State governments to stem the spread of the virus have radically altered day-to-day life and will have a meaningful, negative impact on economic activity. In response to this reality, policymakers have moved very quickly to stem the negative impact of these measures.
Here is a summary of the actions that have been taken to try and curb the negative impact:
March 3: Fed reduces short-term interest rates by 0.50% after an emergency meeting.
March 15: Fed reduces short-term rates by 1.00% to near zero and re-launches its Quantitative Easing program, which allows the Fed to buy U.S. Treasury bonds in order to keep rates low and liquidity flowing.
March 17: Fed announces programs to support commercial paper markets and provide further liquidity to the banking system so credit can flow to businesses and households.
March 18: President signs the Families First Coronavirus Response Act, which mandates paid leave for workers who get sick, offers free virus testing, and expands Medicaid and unemployment benefits.
March 20: Federal Reserve and other global central banks announce a coordinated effort to increase liquidity in the global financial system. The Fed also announces that it will provide liquidity support to municipal bond markets.
March 23: Fed announces further expansion to liquidity support programs to assist mortgage markets and investment grade corporate bond markets
March 24: Congress nears deal on a $2+ trillion spending bill to provide cash directly to taxpayers ($1,200 per person, $2,400 for married couples plus ~$500 for each child). Also part of this package is money set aside to “bailout” companies critical to infrastructure, such as airlines.
The speed at which the Fed and government have responded to this sudden economic slowdown cannot be overstated. During the 2007-2009 Great Recession, it took a year and a half for them to A) recognize the severity of the economic problem at hand, and B) craft an effective response to the recession. This time around, it’s taking less than a month to bring the full force of the Federal Reserve and Government to bear in dealing with this crisis.
In our view, these policies are an appropriate response to keep financial markets open and functioning, while providing immediate assistance to millions of people that are affected by business closings and orders to stay home.
But we also want to be clear that the sudden stop of the economy that we’re experiencing is like nothing we’ve seen before. And that means that economic data is going to look very, very bad.
The economy is likely to contract by upwards of -20% in the short-term, the sharpest slowdown we’ve seen INCLUDING the Great Depression of the 1930’s.
Unemployment claims for the latest week might come in between 1-2 million people; that’s 1-2 million people that will have filed for unemployment IN ONE WEEK. That’s ~3x the worst week in history, which was recorded in the early 1980’s.
Furthermore, we still have to see a “flattening of the curve” in terms of the spreading of the coronavirus. The longer this drags out, the more damage it will do to the economy.
Anecdotal data in China and South Korea – where the virus first broke out – suggest that daily life is about 2/3 of the way back to normal after they “locked down” in late January. That would suggest things starting to normalize here in the U.S. by Memorial Day. That’s the hope in all of this.
If things can start getting back to normal by then, then the economy and employment would quickly snap back. Our sense is that a lot of the layoffs would be temporary and the same workers would be hired back once restaurants and businesses can safely open operations again.
After dropping 35% from its all-time high on February 19, the S&P 500 is likely to remain volatile. The speed at which the market corrected far surpasses anything we’ve seen in history.
The direction from here depends on how quickly officials can “bend the curve” on new virus infections. Markets tend to bottom when investors perceive that things are getting worse at a slower pace (sometimes called the ‘second derivative’).
We continue to stick to our portfolio management strategy of responding to what the market gives us. If anything, the speed at which the market has fallen validates how we manage your portfolios.
Late 2019 and early 2020, we were busy trimming stock exposures for many of you. We weren’t doing that because we thought the market was going to drop. We did that because the market rally was leaving many of you over-exposed to stocks relative to your financial goals.
Similarly, we’re not in the business of calling market bottoms. But given the speed and severity of the recent market drop, many portfolios have become under-exposed to stocks relative to your financial goals. So, don’t be surprised if you see us taking some initial steps to bring your portfolio back in-line by buying beaten-down stock funds.
We’ll continue to provide you with our latest thinking. The economic and market situation is moving very fast and you deserve to stay up-to-date on what’s going on and what we’re doing in response.
Wondering how this affects your future finances? Schedule a call with Financial Design Studio, financial advisors in Deer Park, to discuss your portfolio today.