President Donald Trump’s primetime address from the Oval Office last night was not enough to ease concerns around the Coronavirus pandemic. There is still uncertainty around healthcare and immediate economic support measures. We remain optimistic that the Administration and Congress will pull through to produce a sizable, specific and implementable fiscal plan. It will come.
To ease the anxiety, we should expect a two-pronged policy response: both monetary and fiscal. First, monetary policy relief: look for the Federal Reserve (“the Fed”) to provide additional liquidity and lower rates to zero, and soon. We received an indication of the Fed’s intentions today with the announcement of massive “repo” operations where the Fed will offer to buy $1.5 trillion of United States government securities that will provide liquidity to the market in coming days. We are familiar with this technique, widely known as Quantitative Easing – the most impactful tool to help improve the economy. We should also see a 50-basis point interest rate cut at next week’s Federal Open Market Committee (FOMC) meeting. Providing additional liquidity support will calm the all-important credit markets. Importantly, this is not currently a financial crisis; it is a “biological” and evolving economic crisis. As long as the Fed is vigilant, it can provide substantial support to credit markets, reducing risk of a “credit crunch” – the proximate cause of the Great Financial Crisis in 2008-2009. But the Fed can’t do it alone.
An announcement of a sizable, specific and implementable fiscal plan would go a long way to assuaging market anxiety by constraining the bands of uncertainty amongst investors. A “market-friendly” fiscal plan would include spending money to contain the public health crisis including paying for testing and immediately supplying more testing kits, providing emergency protection gear to first responders and healthcare workers, and providing supplies to health centers. The plan would also attempt to mitigate the economic fallout by directly assisting working people and families dealing with the virus, including paid sick leave and expanded unemployment benefits. It might also include a payroll tax holiday that would be very helpful if backdated to January 1, 2020.
Looking at the outcomes through the lens of politics is instructive when trying to assess the probability of any response – and the timing. Despite chaotic media coverage, we believe the Administration has it within their power to stop the “fever panic.” The President, working with Congress (albeit under duress), will take another stab at communicating a sizable, specific and implementable fiscal plan. The deep partisan divide in Washington, D.C. is a significant hurdle to the adoption of any emergency support measures and lines are being drawn around payroll tax relief, among other issues. Compromise is possible but will only come after the wheels of politics run their course.
There is reason to believe that a plan that combines elements of the House and the Administration’s policy priorities is achievable. Both sides will find political cover as the crisis deepens and citizens – and investors – clamber for relief. At some point, Congress and the Administration will be motivated to fund whatever it takes to provide meaningful support. However, the longer it takes to get there, the longer volatility will remain. Steps to a deal are a progression – we are moving in the right direction.
Crisis events are certainly not a new market phenomenon – there have been and will be points in time when fear overshadows rational thinking, resulting in extreme short-term market gyrations. History has shown that, with the benefit of time, investors are able to digest the new information, evaluate the real-world implications of the event, and adjust to the risks and opportunities presented by the current environment. The below chart shows rebounding market results 6-months and 12-months after previous epidemics.
One thing is sure – the virus will fade in the fullness of time. Cases in countries that were affected early in the initial outbreak are declining, so we know what needs to be done: testing and social distancing. The economic damage is currently manageable, and with the expected muscular policy response, it will also fade. Businesses will recover with lending support which will encourage hiring and investment in capital. Consumers will refinance mortgages at historically low levels, supporting consumption.
Where Do We Go from Here?
The obvious question for investors is what to do now. We believe that the patient and diligent execution of a prudently designed investment strategy is the best course. Our emotional selves are screaming “sell,” while our impartial investor side whispers “buy.” Listen to the whispers. Patience and an unwavering investment discipline enable successful long-term investors to stomach the volatility, stay the course, and accomplish their financial goals.
At Beacon Pointe, we are committed to maintaining our business operations to ensure that you continue to receive the highest quality service without disruption. Your Beacon Pointe advisory team is diligently monitoring your portfolio and is available to you for any questions or concerns. It is important that we remember, patience and discipline are key ingredients of successful long-term investing, especially in times of market volatility.
Please feel free to call your Beacon Pointe advisor should you need additional information or have any questions.
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