In a surprise move, the Federal Reserve has cut interest rates by 1% to 0% and embarked on a round of quantitative easing “QE” that has not been seen since the Financial Crisis and never this much in one day. Despite such an unprecedented move, stock futures are currently trading down.
The news surrounding the Coronavirus continues to be on everyone’s mind and affecting all of us in virtually every part of our daily lives. As a result, it is easy to see why financial markets are under stress. Due to social distancing, self-quarantining, shuttering of public places and wide-ranging cancellations, the market is struggling to react to the economic stimulus.
The real friction point for markets lies between the effort to accelerate economic activity while at the same time dealing with the need to completely shut down economic activity. Historically, monetary and fiscal policy has been designed to increase economic activity. However, in response to this crisis, health officials are pushing for the exact opposite. So, effectively, what the government is attempting to do is blow “air” into our “lungs” as we hold our “breath” waiting for the virus to run its course.
This tug-of-war between growth and quarantine will ultimately be won by growth. Do not lose sight of this reality. Nothing, virus or otherwise, will prevent economic activity from getting back to normal once the threat has subsided. Yes, there will be permanent changes to our behavior in response to this pandemic. The likely changes will be the kind that lead to a cleaner and healthier world. They will make traveling, gathering and living a cleaner, and therefore healthier, experience.
It is also important to recognize that many of the changes to behavior following the financial crisis are on display. Following the crisis in 2008, individuals reduced their debt to equity ratios. Banks increased their reserves and decreased their leverage. As a result, the banking system and individuals are entering this crisis in a stronger financial position than they did 13 years ago. Additionally, the Federal Reserve has learned moving faster and more boldly will lead to a better result than tip-toeing toward a response.
Our view is that economic activity will pick up soon. Markets do not need for the virus to be completely eradicated to begin their return to normal. They simply need to get to a point where the slowdown has been “baked in” to stock prices. Once this has been accomplished then the stimulus injected into the economy will truly have its effect.
We believe patience will be rewarded for investors. Here at KIG we are scrutinizing our holdings for clients to make sure we have holdings we believe will be solid ones for the recovery. Regardless of quarantine, social distancing or any other measures to contain the virus, nothing will contain our dedication to clients and their investment portfolios.
Kessler Investment Group, LLC