Markets & Economy

It’s hard to imagine now, but it was less than six weeks ago when the stock market was at all-time highs. Economic growth was on solid footing, and the investment world was still enjoying the longest bull market in history. So much has changed.

The spread of the Coronavirus (COVID-19) pandemic has been rapid. COVID-19 is highly contagious and difficult to contain. It takes days for those infected to show symptoms. Its ease of transmission and devastating impact has created a public health crisis, threatening to overwhelm health care systems across the globe.

To alleviate the pressing medical burden and slow the virus’s spread, governments are imposing drastic measures including the closure of non-essential businesses and mass quarantines. With such an interconnected economy, the net effect of these initiatives is grinding economic activity to a halt.

The question many are now asking is whether the medical benefits of these policies are outweighed by their economic toll. This is a moral dilemma with no easy answer. As investors, our task is not to pass judgment, but instead, it is to analyze the impact of these decisions and position client portfolios accordingly.

Measuring the Damage

At this point, it is still very unclear what the economic toll will be. Most economic data are yet to be released, and what we are left with is a mix of volatile, short-term indicators and non-traditional measurements.

For example, new unemployment claims are released weekly. Although the data can be volatile, last week’s report was not only an all-time record, but it was an order of magnitude beyond anything the US has ever seen before. The staggering surge was so significant as to crash online systems in several states, and it is difficult to make a comprehensive evaluation from something so unprecedented.

We can also look to data from outside-the-box sources to gather a sense as to the extent of the impact. Data from OpenTable, an online restaurant booking service, shows that reservations have fallen precipitously, as have movie theater ticket sales. Both air and automotive travel are materially weakening as well.

It is hard to know exactly what these sources indicate about the long-term impact. The economy has experienced a significant and rapid shock; real damage has been done, though the extent is unclear.

Source: Federal Reserve

Stimulus Like We’ve Never Seen

While the size and scope of the toll is enormous, so too has been the governmental response. Late last week, Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the largest stimulus package in US history.

At a price tag of over $2 trillion, the CARES Act is a significant step toward cushioning the blow of the sudden economic pause. The bill provides an assortment of loans and grants for both businesses and individuals. There are funds for the health care sector, a loan program for small and medium sides enterprises (SMEs), a cash pool for industry specific needs (e.g., airlines), an expansion of unemployment insurance benefits, and most controversially, direct cash payments to individuals in the form of direct deposits or checks in the mail.

The quantity of fiscal stimulus provided in the CARES Act is remarkable, and it comes on top of an equally impressive degree of monetary stimulus. This week, the Federal Reserve further upped its financial market support, announcing its asset purchase program will have no limit. Recent moves by the US central bank, as well as other global central banks, have improved the stability and liquidity of the financial system.

As compared to the Great Financial Crisis, policymakers are moving with great speed and aggression. The goal of these responses is two-fold: First, it is to stabilize financial markets, particularly in fixed income, to ensure the financial system remains well-functioning during this time of need; and second, it is to put a floor under economies suffering from halts in non-essential business activities.

Source: Eurasia Group

Reasons for Optimism

Many seem to be speculating that the economic recovery from the COVID-19 pandemic will be quick. We disagree. Our view is that the process will take time, and global growth is still well off from bottoming out. We believe it is likely the stimulus measures taken thus far are only the beginning of governments’ responses to the virus and its impact.

Our more realistic view of the prospects for a speedy recovery are not to be taken as a universal negative. The current market environment remains highly volatile, but we see areas of positivity. Even with the recent rally, financial markets are presenting opportunities to own strong businesses at attractive valuations.

For example, the US is home to a large number of dominant, world-class companies. Today’s bear market has provided a compelling entry point into many of these businesses. Within multi-asset class portfolios, we are capitalizing by upgrading portfolios and incrementally adding to stock exposure. This sentiment also extends to leading companies in international markets as well.

With so much economic and policy uncertainty clouding our view, it is difficult to make a confident call on whether the market has bottomed and will rally from here. Rather, in fundamental portfolios, we are focused on adhering to our time-tested processes by looking for strong strategy fits. While unnerving, periods of market stress often provide the best opportunity to find great businesses at attractive valuations.

Staying active and maintaining flexibility is as important as ever. That is why we believe our disciplined, actively managed investment approach is vital to navigate difficult markets such as where we are today.

For more on the implications of the CARES Act from a wealth management perspective, please view our piece Highlights of the CARES Act from our Financial Planning blog.