COVID-19: Update on Monetary & Fiscal Policy Efforts


Monday, March 23, 2020 at 4:30pm

Good afternoon.  The staff at Comperio wanted to provide another update given the unprecedented nature of this crisis and the market’s response to it.  And once again, we ask for your understanding that the situation is unfolding rapidly and that this communication may be outdated in a short period of time.  Nevertheless, we feel it is imperative to provide you with the latest information.

At the time of this writing, the members of the US Senate are negotiating a bill to offer a staggering level of support to the economy.  Additionally, in an effort to maintain liquidity in the system, the Fed has increased its firepower from $700 Billion that was offered last week to what is now an “uncapped” level of support.  I’ll get into some of the specifics in a minute but first want to explain at a high level what the US Government is attempting to accomplish.

The overall outlook, from the government’s perspective and from the asset managers we’ve spoken with, is that we are in a temporary crisis.  While the crisis is severe – unlike anything we have experienced in the past – it should be short.  What the government is attempting to do, using the words of JP Morgan’s Chief Strategist, is to put the economy in “a state of suspended animation” so that consumers and businesses are able to return to normal as soon as the virus is contained. 

Economic Outlook – Across the asset managers we’ve spoken with (or read their analyses), the expectation is we will see a moderate pullback in Q1 2020 with GDP growth between 0 and -4%.  During the second quarter is when we will be hardest hit.  Current estimates from various sources range from a 10% to 50% drop in real GDP Growth and unemployment rates ranging from 10% to 30%. The range of forecasts says as much about this crisis as actual numbers.  We’re usually looking at differences of less than 1% across GDP forecasts.  Nobody knows for sure. 

There is good news – at least the hope for good news.  Although timing varies somewhat across our sources, the expectation is that the economy will begin to recover in Q3 (early or late, depending on the forecaster) and certainly into Q4 and 2021.  Again, to quote JP Morgan: “2020 is the year of the virus; 2021 will be the year of the recovery.”  Again, this is what we are hearing today and is subject to change.

Government Stimulus – Let’s start with the Fed.  Earlier this month, the Fed dropped its lending rate to near zero (0% – 0.25% to be precise).  It also added liquidity to the short-term lending markets in an effort to improve how they function.  (Liquidity is added by offering to exchange US Treasury bills for cash.)  Last week, they added further support – offering to purchase up to $500 Billion in Treasuries and $200 Billion in mortgage securities.  This morning, in a surprise announcement, the Fed “uncapped” the level of support it would provide to these markets.

With the markets fully supported, the Fed turned its sights to the economy.  It announced three new lending facilities this morning aimed at helping businesses.  Two of the programs are designed to help large businesses with both new and existing loans.  The Main Street Business Lending Program is designed to offer loans or guarantees to small or medium sized businesses.  Further, the Fed announced it would buy commercial mortgage securities (apartment complexes) in addition to the residential mortgage securities it previously addressed.  Not to be left out, new programs are being established to help municipalities and states.

Congress is attempting to get in the action.  (For those of you who are frustrated at the slow nature of the response – the topic is off limits here.)  The Senate bill has hundreds of billions of dollars earmarked for the crisis.  This includes direct payment to individuals, couples, and families (subject to income limits), expanded support for the unemployed which includes higher payments and longer coverage, appropriations for hospitals and protective gear and loans for businesses both small and large.

Market Outlook – What does all of this mean for markets?  First, let me stress that nobody knows that will happen.  But the way to deal with uncertainty is to form an outlook (based on past experience and/or economic reasoning) and then adjust it as new information becomes available.  While outlooks differ across the forecasts we’ve seen or heard, most are looking for the economic recovery to begin before Q4 2020.  And historically, markets begin to recover before the economy.  But here we are in late Q1.  What now?

As of Monday afternoon, the S&P 500 is -34% since its peak in February 2020. We’ve seen forecasts for the S&P 500 as low as 1,800 (currently 2,230) with others in the low 2,000. [At 2,000, the fall will have eclipsed 40% from the February high].  We do expect the volatility we have seen over the past two weeks will continue into the foreseeable future. It is crucial to remain disciplined in the approach to your retirement plan strategy. 

Good news for Virus Treatment.   According to a JP Morgan study, there are 31 companies currently developing vaccines or treatments.  Further studies show effective treatment using a combination of an existing, low-cost malaria drug paired with an existing anti-viral.  No remedy is without risk and this treatment is not a panacea but we can say the healthcare community has already responded in heroic fashion.  The number of cases in China, South Korea, Japan, and other areas has been contained, at least for the moment.  Although early, recent reports out of Italy suggest the outbreak may have stabilized, albeit at a tragic level.

The best investment advice we can offer at this time is similar to the safety advice we are receiving from healthcare professionals: “stay disciplined.”  We are instructed to stay disciplined in hand-washing and social distancing to protect us as much as possible from the virus.  And we should stay equally disciplined in diversifying our investment portfolios.