Sheltering in Place
Our long-term clients will remember the “Bear Market Updates” we provided amid the market turmoil of 2008-2009. As then, we are determined to communicate our actions and observations as we navigate, from an investor’s point of view, the effects adjacent to the coronavirus as well as the current collapse in oil prices. As investors move through this latest challenge, we will periodically send out what we hope are timely and relevant commentary regarding our investment stance.
Today we will focus on what policy makers, particularly the Fed, have done in response to the market fallout from the coronavirus and the mitigation efforts currently underway.
Cutting the Federal Funds Rate, Quantitative Easing and Encouraging Lending
On Sunday, March 15th, the Federal Reserve’s Open Market Committee announced a 1.00% cut in the federal funds target rate to 0 to 0.25%. This comes in the wake of a 0.50 % cut a few weeks ago. The federal funds target rate is the rate that the Fed suggests banks charge to loan money among themselves on an overnight basis. This important rate affects other key interest rates such as the Prime lending rate. It also signals to other markets that the Federal Reserve Bank is on the job to support the banking and broader financial system.
In addition to the rate cut, the Fed announced that they are going to be purchasing $500 billion of Treasury bonds and $200 billion of mortgage backed securities. This is a renewal of the “quantitative easing” regime that prevailed during the years following the financial crisis of 2008. The Fed will also continue to support the overnight and term commercial paper market.
These are powerful actions which signal the bank’s resolve, provide liquidity to banks and assists with the smooth functioning of markets.
In addition to these actions the Fed has temporarily relaxed the rules regarding the reserve requirements applying to banks encouraging them to make loans during this time.
What have the Politicians in Washington Done?
The Administration and Congress have moved surprisingly quickly to combat the health and economic effects of this epidemic. A bill providing over $8 billion to support the testing and prevention efforts of the states and cities has already been signed into law. Last week the House passed a bill, on a bipartisan basis, that expands unemployment insurance, offers paid sick leave and mandates free testing for the coronavirus. It also provides for certain tax credits. The Senate is expected to take up this Bill this week. If passed the President is expected to sign the bill.
The President has recently proposed an $850 billion stimulus package which further expands unemployment insurance and places a moratorium on foreclosures and evictions. Additionally, the Administration would like to suspend the payroll tax through the end of the year and provide relief to industries most affected by the coronavirus mitigation efforts. Discussions regarding the stimulus package have begun but a time frame for their implementation is unclear.
What Does this All Mean?
All of these actions taken together are a potent response to the challenge facing citizens, officials and investors. These actions and proposed actions should do a lot to restore confidence, particularly in the financial markets.
While the full financial effects of the virus containment efforts are still unknown, these steps should ease concerns regarding disorderly stock and bond markets. That is to say, investors always assume the risk that their investment in company shares or bonds will decline or rise in price due to changing earnings and interest rates. Investors should not have to be overly concerned that the market conditions prevent them from transacting their trade at a fair and transparent price. The moves by the Fed go a long way toward addressing concerns about market conditions.
The actions by the federal government to provide fiscal relief and aid to affected citizens and industries are positive on a number of fronts. First the proposed actions seem tailored to help the citizens and industries most affected. As importantly, in our view, the sight of our officials and representatives working together to solve an acute threat to our well-being is a big confidence boosting exercise that goes beyond the dollars disbursed. This should be a net positive for investors as the gloominess that gripped participants last week abates.
Where is the Market?
As of close of business yesterday, the S&P 500 is trading at less than 14 times a conservative view of its 2020 earnings. This level is below the average for the past 10 years and at about the level from which previous markets rallied. All bear markets are different and there is nothing in the numbers that would keep stocks from sliding further. However, the risk/reward proposition facing investor, particularly long-term stock investors, is considerably better than it was last month or last week.
Bonds and other safe havens such as gold seem stretched. While they have and will continue to be essential as buffers against market events like those we have experienced over these last few weeks, we expect rates to rise (and bond prices decline) as market stress abates.
Of course, there is no way to call an “all clear” for markets. They will continue to experience heightened volatility as this unusual time plays out. But we should all note and be encouraged by the strong actions taken and commenced by our policy makers.
We will continue to stay attuned and in touch as we navigate on your behalf. As always, do not hesitate to reach out to talk with us if you have any questions or we can provide any service.
The Altavista Investment Team
March 17th, 2020