MARKET COMMENTARY

Three Responses Driving Markets: How Much Progress Is Being Made?

03.18.2020

We believe the current crisis in financial markets, which rendered markets almost untradeable, can be viewed across three responses—monetary, fiscal and healthcare.

The Fed, as well as other central bankers, has already put its lever in motion. With legislation now enacted focusing on the coronavirus impact to workers and more financial stimulus seemingly on the way, we see a second aspect well underway. The last, however, lacks some clarity, owing much to the unknown contagion effects surrounding the coronavirus and the associated impact of social distancing, work-from-home policies and anticipated business closures.

Monetary policy response: Central bankers go “all in”

Over the weekend, the Federal Reserve lowered interest rates to zero percent and restarted quantitative easing with a $700 billion program. Essentially, the Fed has thrown the kitchen sink at the problem. We believe that it is responding to the fast-moving stresses of this situation and has taken prudent preemptive measures. The Fed is not alone in this fight as we have seen a coordinated global monetary policy response from the other central banks including the Bank of Canada, Bank of England, European Central Bank, Bank of Japan, Reserve Bank of Australia and Swiss National Bank.

Fiscal policy response: Circling the wagons

To be fully effective, any monetary response needs to be complemented by stronger fiscal policy measures, with the latter being of greater importance. Hence, it is key that the US Congress has already passed an initial $8.3 billion response to the crisis and is in the process of completing a second package of legislation. In addition, the Trump administration is crafting a roughly $850 billion economic stimulus package to help cushion the economic blow of the coronavirus pandemic. Adding to these domestic legislative efforts, many other countries having taken aggressive fiscal measures including Germany, Australia, Italy and China, to name a few.

Healthcare policy response: A time to test

President Trump has declared a national emergency in order to free up emergency funding for those impacted by the virus, adding to recent legislation that expands access to free testing, provides funds for food aid and extends sick leave benefits to vulnerable Americans. Further, a multitude of labs across the country will begin processing coronavirus tests. In this regard, one indicator that our team is now focused on is a peak in global and US virus cases as the new infection rate outside of China could be the single most potential upside catalyst. We would stress that we expect the rate in the US to likely accelerate in the days and weeks ahead as test kits become more widely available across the country.

What we think lies ahead

In the US, our team thinks that the first quarter growth will be weak, with the second quarter likely seeing a sharp contraction in economic activity. Beyond that, much will depend on how the coronavirus contagion plays out over time. Currently, we recommend that investors maintain a cautious and patient approach to financial markets as more clarity emerges across monetary, fiscal and healthcare responses.

Ron Sanchez
Chief Investment Officer




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