By: Peter Mueller
With the first quarter of 2020 now behind us, we reflect on the extraordinary moves in the financial markets as a result of the coronavirus pandemic. This is a global health crisis that has affected everyone – some populations and economies harder than others. Health and lives matter first, and governments (at the national, state, and local levels) are responding to reduce virus spread and save lives. Together, we are all taking part to reduce virus spread by staying home and practicing social distancing.
While necessary to save lives, our nation’s lack of preparation resulted in the need to shut down much of our service economy to reduce virus spread. This action has hurt many workers (new jobless claims surged by 6.65 million last week alone), produced large declines in global asset prices, and impacted many business (i.e. restaurants, travel, our local service economies). Government is responding aggressively to the economic dislocations by providing some support to people and businesses through the recently passed $2.2 trillion CARES Act. Size of the fiscal response to the virus has been large – however, based on the trend of rising infection cases we can assume that more support may be coming (i.e. infrastructure spending):
March 6th 319 cases nationally Approved $8.3 billion program/spending
March 18th 9,197 cases nationally Approved $100 billion program/spending
March 27th 104,126 cases nationally Approved $2.2 trillion program/spending
On the monetary side, the Federal Reserve has acted quickly and aggressively by dropping interest rates to 0% and restarting its asset purchase program – expanding to areas such as investment grade bonds and currencies to provide added liquidity and support to our economy. The Fed has basically pledged unlimited support to the economy as it aims to meet its twin goals: price stability and full employment. This is a massive monetary stimulus which will not only help support economic conditions during this time but will eventually provide a big boost to asset values once we have the health crisis contained.
These massive spending policies will help navigate the economy through this difficult period of rising infections and social distancing as we will see a lot of negative economic affects and data over the coming quarter. The good news is that viruses and their effects on economic conditions and market sentiment can be transitory. Economic contractions end as well, and this one was borne out of an external (health crisis) shock – not an internal issue such as an over-leveraged or illiquid financial system. This bodes well for a durable recovery as we were in good economic shape going into this crisis.
It’s important to remember that financial markets are in the business of discounting, or anticipating, the future. As a result, they generally lead economic cycles. Markets react first, corporate earnings and earnings guidance then come down, and actual economic data begins to validate the same negative trends. Eventually, markets decline more than enough to “price in” the known and potential negative outcomes. At this point, they begin to rebound – often quickly – well before the negative cycle ends. The rebuild, or new bull market, will not be born on good news, but rather out of bad news and negative sentiment. We believe we are navigating that negative news and sentiment now and over the coming month. Times like these require patience, knowing that this too shall pass. Markets will recover as they always have. For the long-term investor, the importance of being in the market outweighs trying to time the market. Due to the steep decline in market prices, expected returns going forward are more compelling today with compressed valuations and negative sentiment than they were in January when we all felt much safer and better.
Our goal, as it has always been, remains to invest in high quality businesses with strong balance sheets, leaders in their respective markets, with shareholder friendly management. Such businesses typically strengthen during crises by gaining market share at the expense of weaker competitors. Given time, this crisis will abate, and the value of high-quality business will increase again. Finally, once the health crisis begins to subside, social distancing measures are relaxed, and life begins to resemble some normalcy, the massive fiscal and monetary policies should serve as a significant tailwind to asset values. The key is getting there by containing the health crisis while developing more permanent solutions.
We will get there. No one can say exactly when, but the entire world is singularly focused on this one problem. We are confident positive outcomes and great things will happen as the world’s best scientists and talent are working together globally on this problem unlike any time in history.
We appreciate your continued confidence and support, and as always, please contact your Advisor if you have any questions or wish to discuss.
Your HoyleCohen Team