Volatile share prices. Day after day of tragic headlines. It is a scary period to live through. Stepping back from the daily headlines to gain perspective is hard, but needed. We are looking at progress in three areas, monetary policy, fiscal response and virus progression, before markets can stabilise. Progress is being made on all three but we are not there yet.
It has been quite a few weeks.
As late as 19th February shares were hitting all-time highs. It was a rampant bull market complete with all the excesses you might expect after ten years of good times. Since then coronavirus has spread to become a global pandemic with thousands of lives lost. We have had the fastest 10%, 20% and 30% fall in US share prices ever. And, at least for odd moments over the past few weeks parts of the financial system have been rendered dysfunctional.
In the blink of an eye almost everything has changed.
For many of us the real challenges, both to our health and our jobs, have just started. It’s scary to live through and scary to watch as investor.
Fear makes getting perspective hard but yet perspective and, a good dose of patience, is exactly what’s needed to navigate the world we find ourselves in.
To help us get perspective, and a sense of what comes next, we are focussing on three key factors that we think are required for markets to stablise. The good news is that progress is being made on all three.
1. Monetary policy response
Ensuring the flow of cash through the financial system and reducing the interest burden on companies and consumers is an important step in stabilising the economy and markets.
Central Banks, like the Reserve Bank of New Zealand, and the US Federal Reserve (the Fed) get the importance of this and have been very aggressive in supporting the economy. They are in “whatever it takes mode.” That has meant Quantitative Easing (QE) has been reignited in the US and Europe and in New Zealand and Australia, for the first time ever, central banks are buying government bonds.
The Fed is now not only buying back government bonds, but also Mortgage Backed securities, which it didn’t do in the GFC. The Fed is also, for the first time, and requiring some legal shenanigan’s, buying investment Grade corporate debt and fixed income Exchange Traded Funds. Basically, if it’s not nailed down the Fed is buying it.
Ensuring the financial system is awash with liquidity won’t save the global economy, that needs real demand from consumers like you and me, but it certainly helps, and it helps avoid nasty financial accidents.
Decisive central bank action is a key step in restoring balance to the wavering global economy and we are most definitely getting that.
2. Fiscal response
Governments, as well as central banks, are key to helping the global economy navigate the coronavirus crisis. Governments tend to move slower than central banks, and this is a less worn path, but they are rising up to the challenge.
The New Zealand government has announced a $12b package aimed at easing the impact of coronavirus on the economy and protecting our most vulnerable people. This has involved increased payments to beneficiaries, wage subsidies to small business and a direct lending package to small business, that ultimately will also be rolled out to larger businesses. It’s a start. Expect more before this passes.
Other governments around the world are rolling out similar packages. The US, for instance, announced a $2t rescue package including direct payments to all taxpayers earning less than $99,000. The government has also provided extensions to unemployment insurance which will be of critical importance. Over 10 million workers in the US lost their jobs in the last fortnight and will now be added to dole queues.
Like NZ the US is advancing emergency loans to employers who keep their workers on and loans to larger companies, including industry focussed payments to the likes of the airline and hotel industry.
We expect the global fiscal response to increase over coming weeks. This will be important to re-establishing stability in markets.
3. A slowing in virus progression
With some exceptions, most countries have adopted some form of lockdown, allied with a significant step up in testing, to prevent the spread of coronavirus and, to use the term of the day, “flatten the curve.”
It seems to be working. New case loads in China, South Korea and Singapore have significantly reduced, appreciating that some of the data might be a little ropey! Even in Italy and Spain new case numbers have plateaued. These are positive developments.
There is a problem though. Getting everyone back to work won’t be easy. Coronavirus is a little like a forest fire. If you leave traces behind it will reignite. The only way to stop that happening are rigorous post lockdown programs. That will still mean some restrictions on how we behave. This will impact economic growth in the recovery phase.
Optimism and patience
I am a hard wired optimist. I firmly believe that through innovation and discipline, coronavirus will be overcome. But as investors we are going to have to be patient and live with uncertainty. Progress is being made on all three of the factors that will lead to market stability, but we are not there yet.
Meantime our focus is less on what direction markets will take and more on ensuring our companies are well positioned both to survive the challenging period ahead and will be able to embrace the eventual recovery.
Keep safe, take care of the people around you and I hope one day we can look back on this as a period of our lives where we learnt more about ourselves, each other and the things that are most important in life.
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