The unknown can be frightening. Keeping perspective becomes challenging especially in today’s 24/7 media and social media driven world. We are far more comfortable with the known. In our present uncertain time, we must keep in mind cooler heads prevail.
EBW endeavors to provide our clients with information to keep perspective on our economy, markets and government policies that impact them.
We have never acted in such a large way before as to shut down activity in America like this. It has alarming consequences. It causes panic.
We want to focus on what we know at this moment.
Over the last few weeks Markets have been hit by Multiple Shocks
SHOCK #1: COVID-19 (Containment is Key)
The Corona virus has now spread to over 70 countries and undercut growth prospects for the global economy.
- ASIA: Aggressive Government Response Leads to Early Containment
- Europe: Advancing Stage of Outbreak - After a slow start Government Response is now High
- US: Early Stages of Outbreak, Government Response also Lagged until recently
Weekend Massacre - Russia vs OPEC – Unexpected Oil Shock Magnifies Global Worries
- Pain now but Gain later
- Negative for: Earning (Energy sector), Credit markets (concern about higher defaults hurt Banks
- Positive for: Consumers (like a pay raise) & Businesses (lower input costs), Emerging mkts who are net importers of Oil.
Interest Rates Plummet
Massive Global Uncertainty Driving a Flight to Safety
Markets are in the business of pricing in risk and the two main concerns are:
- Trajectory of the virus
- Economic and financial impacts of the virus and the oil price shock
- Bounce back in China and economy gets back on track in Q2
- Europe – virus is seasonal, and impact tapers off in the summer
- Emerging markets fare worse, but most are ok
- Markets stabilize and by Q4 we are in recovery
- Chinese economy slows for real.
- Western economies cut China from their supply chains and the US & China end up in cold war type situation.
- Lack of global coordination causes the virus to spread further and new outbreaks emerge
- Panic buying leads to shortages and US consumer confidence plummets to 2008-09 type levels
- Internal strife and regional wars become more likely as social discontent climbs higher in emerging markets
- Global travel plummets
- Markets continue to fall and the World heads into recession without a coordinated global response.
The initial policy response was a little shaky and did not instill confidence in markets:
- World Bank promised $12bn in loans to fight it.
- Emergency conference of G7 finance ministers and central bankers came away with no collective strategy.
- They promised to monitor and provide a piecemeal approach to a global crisis.
What happened towards the end of last week?
- Aggressive reduction in consumer activity in the US (and Europe) is taking hold (faster/deeper than previously modeled) and spooks investors further
What is being done to stabilized markets and to bridge the gap?
Aggressive Fed Action: Fed slashes rates to Zero and launches a massive new QE program.
- Cuts interest rates to Zero
- Opens Market Desk to do unlimited Overnight lending.
- Notifies banks that they can turn to the discount window to meet the demands for credit to households and businesses.
- “The Federal Reserve encourages depository institutions to utilize intraday credit extended by Reserve Banks, on both a collateralized and uncollateralized basis, to support the provision of liquidity to households and businesses and the general smooth functioning of payment systems.”
- “The Federal Reserve is encouraging banks to use their capital and liquidity buffers as they lend to businesses and households affected by the coronavirus.”
- “The Federal Reserve Board reduced reserve requirement ratios to zero percent effective March 26. This action temporarily eliminates reserve requirements for thousands of deposit institutions and will help support lending to households and businesses.
- Bank of Canada, Bank of England, Bank of Japan, the ECB and the Swiss National Bank also agreed to create liquidity swap lines.
You have a coordinated monetary and fiscal response, unlike after Lehman Brothers failed in September 2008.
- The Congress is set to pass 1 to 3 different stimulus bills aimed directly at small businesses.
- Money will most likely be sent to individual citizens.
- Businesses will be given some sort of tax holiday or payroll tax suspension.
- Sick leave may be covered by the government for certain business and industries particularly hard hit by government mandated shutdowns.
- Delayed tax filing for all Americans to July 15th and delayed payments interest free for tax bills up to $1 million to help small businesses to keep cash on hand.
Good News from Sunday our first human trial has begun. COVID19 test kits have been rolled out nationwide and as we test more people the number of cases rise, we may discover the mortality rate is far lower than feared.
The practice of social distancing will reduce the spread at this most critical time. This will allow our medical system to properly care for the most ill.
There are a great deal of unknowns right now and in the next week to 10 days we will gain a tremendous amount of clarity on the virus. If the shutdown is short lived, we may avoid a recession though we will likely see 2nd quarter earnings turn negative. The markets have clearly priced that in. With the stimulus about to hit a short-lived shutdown would be met with an incredible boost from that stimulus. If the shutdown is longer then we will almost definitely experience a recession that will make the recovery take longer to perhaps the end of the year.
A this point there is little to do but follow the guidelines. If we make a hasty move in the markets and the virus doesn’t present at the level of spread and mortality that is feared , we would be caught outside the recovery as markets will react to that information almost immediately.
Be safe and try to enjoy some time with family.
This information was taken from sources deemed to be reliable however Voya Financial Advisors is responsible for the accuracy of this information. Any opinions/views expressed within the information does not necessarily reflect those of Voya Financial Advisors. In addition, they are not intended to provide specific advice or recommendations for any individual.
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