An Update…As We Shelter in Place
Another tough week for the markets and for all of us individually. Many of us are getting used to the evolving impact of “social distancing” on our social, emotional and financial wellbeing. I don’t know about you, but this feels a bit like a movie. I haven’t quite decided which movie yet but it feels other-worldly and a little too eerie with empty streets, shuddered businesses and way too many video conferences.
As happens with any economic crisis, the main questions on investors’ minds are:
“How long will this go on?”
“When will there be a solution to this crisis?”
Of course all of us would like to know the answer to both of those questions. But at this point, we do not know the full ramifications to the economy and most importantly, to ourselves and our families.
So what can or should we do? Much of the selloff has been led by fear of the unknown. And we know from past crisis that the markets come back stronger and healthier after these types of shocks. According to research by Columbia Threadneedle, there have been 19 significant market shocks since 1929. The average drop in the Dow Jones for those shocks was -10.6%. Within one month, the market had recovered 3.8% on average. At the three month mark, up 6.3%, at six months up 10.8 and at twelve months, up 15.4%. (see attached.)
Thus, we are encouraging investors to focus on their long term goals and objectives and stay the course. Though most bars are closed, remember that emotions and volatile markets make a bad cocktail every single time.
That said, there are a few highlights from last week.
- Bonds and the VIX – The bond markets are showing some signs of stabilization and the VIX (the measurement of the market’s volatility) peaked at the beginning of the week but ending the week much lower. Both are helpful signs. And we all know that each week that we follow the government’s social distancing guidelines, we are one day closer to reaching the end of this crisis and allowing the economy and the markets to recover…and if history is any indicator, they will.
These unprecedented times call for unprecedented actions. And that is fortunately what we have seen.
- Fed Action – The Fed is doing its part to help those segments of the economy that need an infusion of liquidity and are not able to meet their credit obligations. On March 15th, the Fed took aggressive measures and announced an emergency rate cut of 100 bps which lowered rates to between 0.0% to 0.25%. They also reinstated quantitative easing (QE) and increased the purchase of Treasury and Mortgage Backed Securities (MBS). This is done for two reasons:
- to drive interest rates down so that money will become cheaper to households and business owners
- to provide general liquidity to avoid these markets from ceasing up
They also lowered the reserve requirement for financial institutions to help support lending to business and individuals. They also announced today that it would be purchasing short term muni bonds to help state and local governments. This week the Fed bought a record $322B in securities which exceeds the $162B record that was set back in 2009.
You might be saying, “That’s great for banks and Wall Street…but what about me, my family and the local economy?”
- $1 Trillion Package – Well, there’s good news there as well. From the White House and Capitol Hill, additional help is being rolled out in several forms of direct stimulus to support the economy, small business owners and its individual American citizens. Late Thursday, the government announced a $1 trillion package to help the hardest hit industries (restaurants, travel, manufacturing, etc.) and to send Americans direct cash payments to assist the poor and middle class during this time of economic disruption. The IRS has delayed the tax filing date for individuals and businesses until July 15 and tax payments would be delayed to Oct. 15. The proposal would also allow the secretary of education to defer student loan payments and interest for at least 60 days.
- Support for Workers – Additionally, President Trump has signed legislation to provide paid sick leave, faster and extended unemployment benefits, free coronavirus testing and food and medical aid to people affected by the pandemic.
- More to Come – And legislators are not done yet. There are ongoing discussions regarding further phases of stimulus over the next few weeks. Some of the proposals include offering low or no interest bridge loans to provide immediate help to small businesses to pay employees and cover rents and mortgages, as we all ride out this downturn. Industries such as the airlines, tourism, and the service sector that have been greatly impacted by the crisis would receive $208 billion in loans, including $58 billion for the airline sector, all to eventually be repaid when the economy rebounds.
Most importantly, all of these significant and impactful steps have happened within just a few weeks. You may recall that it took over 3 months before the government took any real action in the 2008 downturn.
Fortunately, going into this crisis, the fundamentals of our economy were much stronger than where we stood at the beginning of the 2008 financial collapse. Prior to the pandemic, the US had a healthy consumer market, a historically low unemployment rate, businesses had record amounts of cash on their balance sheets, and financial institutions were much better positioned to withstand a crisis. Nordstrom, UBER and Anheuser-Busch announced this week that they have enough cash to operate for the remainder of the year. US household debt is at historically low levels while savings rates are at historical highs with the average consumer saving 8% of their income. That is quite different than during the Great Recession.
If we look at past viral outbreaks like Ebola, SARS and swine flu, etc. initially there was as near term negative shock to the economy and the markets were typically positive within 6-12 months.
So we are in unscripted territory for sure. And if we are living in a movie, let’s all hope we are in “It’s a Wonderful Life” and not “Groundhogs Day!”