Monthly Markets Memo - March 18, 2020
by Dan Zalipski, CFA
The Coronavirus (COVID-19) is severely disrupting the world.
The markets peaked on February 19th. Shortly thereafter it became clear that the Coronavirus was not going to be a “China problem” but rather the world’s problem. By February 25th, the Center for Disease Control (CDC) was warning Americans that they expected to see this virus spread throughout our communities and to prepare for “significant disruption”. Fast forward a few weeks and we are seeing more disruption to everyday life than the average American has ever seen. To add to this, the Saudis and Russians failed to come to terms on an oil production cut in a bid to support weakening prices. In a sudden reversal, both countries increased their oil production and sent oil prices plummeting in a move pressuring American energy producers.
This one-two punch was too much for policy makers. On Sunday the 15th, the Fed cut rates a second time to zero. In addition to the rate cut, they also announced another QE (Quantitative Easing) program like those used after the financial crisis. The Fed will begin purchasing Treasuries and government-backed mortgage securities across a variety of maturities. The intended result of this program is to keep rates low, provide liquidity, and encourage investors to buy assets with more risk than a low yielding treasury.
The Federal Reserve’s actions through interest rates and asset purchases is considered monetary stimulus. Fiscal stimulus comes directly from the Federal Government through changes in spending, laws, or taxes. The government is working on fiscal relief to blunt the economic damage the virus is causing. A relief bill, endorsed by the President, worked its way through the House last week, and is expected to be taken up in the Senate this week. The bill includes free Covid-19 testing, expanded family and medical leave, along with other benefits such as food assistance. The Senate is expected to make some changes to the bill.
The volatility is intense, and the market drop is gut-wrenching. The next several weeks will be crucial in determining the extent of both the virus’s spread and impact on the economy. Governments and Central Banks around the world are coordinating response efforts to protect public health, families, and economies. We caution against emotional portfolio decisions during these highly volatile times. We are using this opportunity to research countries, sectors, and companies that will present attractive opportunities once the crisis eases, things settle and clarity develops. Until that happens, we believe the best course of action is to sit tight, stay put, take care of your neighbor, be kind to our retail and health care workers and – don’t forget: wash your hands.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies and / or opinions are revealed, this post is not intended to, nor does it represent or reflect, transactions or activity specific to any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from sources believed to be reliable and is not warranted to be correct, complete or accurate. Investments carry risk of loss including loss of principal. Past performance is never a guarantee of future results.