Investment Commentary – March 11, 2020

Year to Date Market Indices as of Market Close March 11, 2020
• Dow 24,346 (-15.02%)
• S&P 2,802 (-13.32%)
• NASDAQ 8,144 (-9.77%)
• Gold $1,661 (9.31%)
• Oil $33.49 (-45.29%)
• Barclay Bond Aggregate (3.84%)
• Fed Funds Rate 1.25 (-0.50% 3/3/20)
• US Real GDP Growth 2.1 Q4/2019

Thoughts On the Coronavirus, the Economy, and Markets

“The good news is that going into this situation, the U.S. economy was in pretty good shape, putting us in a better position to withstand the negative impact of this exogenous shock.”

The Risk

The risk of further downside in asset prices is likely to remain elevated until the United States begins widespread testing for the Covid-19 coronavirus and the extent of infection here is known. Only then can we have any idea of the scope of mitigation steps that may be necessary and the magnitude of potential loss to the economy.

Depending on the test results and, more importantly, on how many of those tested are in need of hospitalization, the health care system could be overwhelmed very quickly. Under the circumstances, one would expect significant mitigation measures to be rolled out at some point in an attempt to minimize the spread of the infection. The impact on the U.S. economy would likely be severe, as both aggregate supply and demand would be interrupted, resulting in a deep recession.

The Role of Monetary and Fiscal Policy

Monetary and fiscal policy measures can’t prevent a downturn driven by disease mitigation but might help stimulate a more rapid recovery. Low interest rates, targeted credit, income support, and socialization of healthcare costs would prevent short-term damage from bankrupting households and businesses with weak balance sheets that might otherwise be unable to participate in an economic recovery.

If comprehensive income replacement is offered, particularly to consumers and small businesses with a high propensity to spend, the production of goods is likely to accelerate rapidly to both meet demand and rebuild inventories, i.e. a V-shaped recovery. On the services side of the economy, production is likely to reach previous levels of demand once the need to avoid contact with other people passes, but would only overshoot earlier levels in limited circumstances since, usually, production and consumption occur simultaneously.

Economic Growth

The growth rate of the economy in the longer-term might also be affected by the specific steps taken to foster a recovery. If too much stimulus is applied, it could undermine the low inflation/low volatility growth path the economy was on before the virus struck. In addition, global trade could be damaged, and the growth rate of the global economy could slow, as was the case following the downturn in 2008-2009, if multinational businesses decided to re-localize their operations as a response to unexpected delays in deliveries from overseas suppliers. This might also contribute to greater inflation pressure as effective aggregate supply is reduced.

Around the Web

Constant fluctuation: Price movements were sharp across most major asset classes amid growing fears about the global impact of the coronavirus outbreak. As for U.S. stock indexes, they finished slightly higher for the week overall, despite huge daily swings; the S&P 500 posted two daily gains of around 4%, a pair of roughly 3% drops, and a nearly 2% decline.

Fed to the rescue: In response to the economic damage from the coronavirus outbreak, the U.S. Federal Reserve on Tuesday cut interest rates by 50 basis points, bringing the federal funds rate to a range of 1.00% to 1.25%. It was the first time since 2008 that the Fed approved a rate cut outside of a scheduled policy meeting; its next meeting is March 17–18.

Coronavirus counterattack: As the global estimate of confirmed coronavirus cases climbed above 100,000 on Friday, President Trump signed an $8.3 billion measure to combat the U.S. spread of the virus. In addition, White House economic advisor Larry Kudlow said the administration was considering federal interventions to help workers, companies, and industries hurt by the outbreak.

Federal budget, U.S. Department of the Treasury

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The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.