Down, Up, Down, Up, Down: Looking Through the Chop

It’s another day of elevated financial market volatility, as investors are buffeted by more emergency U.S. Federal Reserve actions, a $1.2 trillion U.S. fiscal stimulus proposal, Rand Paul and ongoing headwinds from the virus and associated government containment efforts.

We’ll address each of these, in turn, but the short of it is the same as what we have been writing about for days now. Governments are using aggressive containment measures to mitigate the human impact of the virus. Those containment measures have severe economic consequences while they are in effect. And monetary and fiscal policymakers are trying to backstop impacted consumers and businesses to help them hold the line until public health efforts gain more traction. That simple paradigm is not just true in the United States, but globally.

It’s more important than ever to try to look through the noise of the daily news cycle and focus on our long-term strategic plans. Valuations for global equity markets and corporate credit have significantly improved. And, as Erik Ristuben noted yesterday, it’s best to ignore our lizard brains in times like these. Following our flight instincts when the rest of the herd is panicked is not a survival tactic that carries over very well to investing in financial markets.

Significant fiscal stimulus package in the pipeline

Arguably the most important development over the last 24 hours has been the truly massive fiscal stimulus package that is under discussion in the U.S. Senate. Current reporting suggests it could be valued at a whopping $1.2 trillion—roughly 5.5% of U.S. gross domestic product (GDP) and bigger by dollar value than the American Recovery and Reinvestment Act that then-President Obama signed into law in the depths of the 2009 recession. Details are scarce at this stage, but it is rumored to contain roughly $500 billion of direct payments to households (checks), $250 billion of assistance to small businesses and $50 billion for the battered airline industry. Those would all be welcome and needed measures.

Importantly, there does seem to be bipartisan push in the U.S. to get something done here—a rarity for this polarized Congress, given the very personal and human nature of COVID-19 as a catalyst and given the fact that no single industry or CEO is to blame, as may have been in the case in prior crises. Timeliness is key here. A reasonable expectation might be that this bill could be passed into law next week. We’ll be watching that. The news overnight that Rand Paul stalled passage of an earlier House of Representatives stimulus bill, delaying it by at least a day, was discouraging and highlights that there are still some risks here. But the bottom line is that it does look increasingly likely that a big fiscal package is in the pipeline for the U.S.

Fed committed to liquidity management

Meanwhile, the U.S. Federal Reserve (the Fed) continues to pull pages from its crisis-era playbook, last night re-establishing the Primary Dealer Credit Facility (PDCF). This facility provides short-term funding to large financial institutions, with the aim of promoting market liquidity in financial markets. We and the Fed have observed wider-than-normal bid-ask spreads in Treasury markets and other abnormalities in recent days. It’s a positive step and again demonstrates the Fed’s commitment to liquidity management.

The importance of looking through the noise

On the coronavirus, discussions continue about various containment measures and the effectiveness they may or may not offer. As investors, though, what we need to be thinking about is how much of this damage is already in the price. As of 11 a.m. Pacific Time, the MSCI All Country World Index is off 32%, relative to a month ago. That’s a big move and already in-line with the median peak-to-trough damage around historical global recessions.

In other words, keep looking through the noise. And keep your long-term strategy in focus.


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