The 1st quarter of 2020 began on a positive note for investment markets, but this quickly changed as the Covid-19 pandemic spread across the globe. The pandemic is a severe global health crisis on a scale we haven’t dealt with since the 1918 influenza pandemic. As a result, significant adjustments have been made to our daily lives that include school closings, social distancing, and ZOOM conference calls as we attempt to slow the spread of the virus and flatten the curve. As countries around the world “lock down” this has directly impacted the global economy and negatively impacted investment markets as people consume less and are uncertain about the future.
In response to the pandemic, the United States has swiftly deployed sizable fiscal and monetary policies in an effort to settle financial markets and to stimulate the broader economy. Fiscal policy is the use of government spending and tax policies are to influence the economy. The signature fiscal stimulus in the United States is the Coronavirus Aid, Relief and Economic Security (CARES) Act which was signed into law on March 27th. The act includes an estimated $2 trillion in aid and is the biggest fiscal stimulus package in modern American history.
Monetary policy is how central banks, including the Federal Reserve in the United States, govern the supply of money and interest rates to influence output, employment, and prices. To help combat the disruption in financial markets, the Federal Reserve cut the federal funds rate by 1.5%. This is the rate banks pay each other to borrow money overnight and it is now in a range of 0% to 0.25%. The goal of this is to reduce borrowing costs for businesses, state, and local governments, as well as consumers borrowing for items like mortgages and auto loans. Additionally, the Federal Reserve initiated an asset purchase program, committing to buy US Treasuries, mortgages, and even corporate and high yield bonds. This is an expansion of the purchase program the Federal Reserve initiated during the financial crisis of 2008-2009.
The question top of mind for investors is “how does all of this impact my portfolio in the short-term and what will be the long term ramifications of this global growth slowdown?” The sudden shutdown of our economy triggered a sharp and swift drawdown in the stock market. On March 23rd the S&P 500 index closed 34% below the all-time high which it had achieved only month prior. This type of market volatility can be unsettling. We highlighted the fiscal and monetary stimulus actions above because that is what has helped to create stability in the short-term. It is clear the economy is contracting and unemployment claims are accelerating which will most likely lead to a recession. The depth and breadth of this recession will hinge primarily on global efforts to combat and ultimately tame the virus.
With history as a guide, if you analyze the last 12 recessions dating back to 1945, the S&P 500 hit its bottom on average five months before the recession officially ended. This is because stocks are what we consider to be a “leading indicator” of economic activity. If the economy is able to restart and we are able to limit the decline in growth to two fiscal quarters (six months), this would then indicate March 23rd to have been the relative bottom. This would be good news and represent the outcome that the aggressive coordinated fiscal and monetary policies are attempting to achieve. If a reopening is d 2020. In either scenario, we anticipate volatility to continue until there is improved clarity on the state of the global health crisis.