What to expect as markets continue to react to the latest coronavirus news
For our most recent update on the COVID-19, please read: What A Week, Really This Time
Equity markets opened sharply down again this morning following President Trump’s address to the nation. The President’s speech underwhelmed investors, who were hoping for a bolder, more substantial policy response. Instead, as one of our macro research providers put it, we got some of the spinach we needed but not the candy. The President outlined the following new initiatives:
- Shutting down travel from Europe for 30 days – This is a big deal to the tourism industry and will have knock-on effects elsewhere. Importantly, the President misspoke during the speech when he said that it applied to “goods and cargo” as well. He followed up with a tweet clarifying that trade will still be open.
- Deferred tax payments for individuals and businesses impacted by the virus. The goal is to boost short-term liquidity in the markets by delaying the April 15th deadline.
- Small business loans for companies whose businesses have been disrupted similar to what we see following natural disasters. Trump is asking for an additional $50 billion of new capacity.
We anticipate additional legislative action this week. Areas being negotiated include:
- Paid sick leave for workers impacted by quarantine orders or who are responsible for children impacted by school closures
- Enhanced unemployment insurance
- Food stamps
- Free coronavirus testing
- Patient reimbursement for non-insurance-covered coronavirus-related costs
- Increased capacity of medical system
- Protections for frontline workers
We also think it important to highlight some of the actions taken by the private sector. Darden Restaurants, Starbucks, Amazon and others have all rolled out relaxed sick leave policies. These aren’t, in our view, actions that companies would be taking if they thought this would have a sustained impact on the economy. We acknowledge the private sector’s behavior may change as the crisis evolves. The labor market was tight coming into the crisis, and many employers are concerned about having to recruit back talent in several months. Certainly, earnings will come under pressure, however, companies came into the crisis with strong liquidity and should be able to weather the storm.
We believe a bolder fiscal stimulus is inevitable. Unfortunately, this issue has become politicized and, therefore, may take more concerning data points before policymakers reach a compromise. While we are hesitant to make analogies to the financial crisis of 2008 (all indications are that banks are functioning well and willing to provide credit), the legislative timeline is a useful guide. On September 20th, 2008, the Treasury submitted legislation to Congress; on Monday, September 29th, Congress rejected the legislation and the market sold off; by Friday, October 3rd, much of the legislation was passed. We anticipate that further market pressure and weakening economic and corporate datapoints will implore policymakers to act, giving us the “candy” that we need to rebound.
Finally, the spotlight shines on our strategy of broad diversification during these turbulent times. Equity exposure is just one component of most portfolios. Our use of diversifying strategies has helped to stabilize the volatility of portfolios. The daily movement of diversified portfolios has been only a fraction of that recorded by the stock market. And, the income produced by bond investments continues to accumulate. Our commitment to broad diversification is resolute, precisely because we know there will be unanticipated events that disrupt the equity markets. Pursuing a strategy of more persistent, less volatile returns, has consistently paid off over long periods.