Financial Markets Update: March 16

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The financial markets are in uncharted territory as investors attempt to quantify the impact from a prolonged economic shutdown. The markets dislike uncertainty and the inability to determine when the U.S. and global economy will rebound. We will emerge on the other side of this crisis but what are the lasting effects and costs in both human and financial terms? The equity markets are back to valuation levels that could prove to be quite attractive for longer term investors, but extreme volatility could persist for some period of time. The markets will likely discount a rebound once the data becomes clearer around the long run effects on the world economies, corporate and consumer activity and the trajectory for corporate earnings.

While developments are unfolding quickly, several important items occurred during the weekend.

First, the House of Representatives approved a multibillion-dollar tax and spending package aimed at addressing the economic fallout from the global coronavirus outbreak. The primary elements of this package included mandates for most employers to provide two weeks of paid sick days for most employees and three months of paid emergency family and medical leave. In addition, the bill also provides tax credits to employers to help provide funding for said leave. The Senate is expected to vote on the bill this week. Although there was no payroll tax cut, future bills could include such a provision. There is still a lot that could be done from a fiscal stimulus prospective to help combat an economic slowdown.  

Pairing with the fiscal stimulus, the second development was related to monetary stimulus. The Federal Reserve slashed interest rates for the second time to near zero. In addition to slashing interest rates, the Fed said it would buy $700 billion in treasuries and mortgage-backed securities to provide additional liquidity to the markets.  In total there have been 95 global central bank cuts. While this liquidity and decisive actions are important to the proper functioning of the markets, these actions have been received with mixed results. Some have interpreted the cut as an act of desperation.   

Although the economic implications of such stimulus are still unknown, markets remain fearful of an upcoming recession. The second and potentially third quarters will likely show a contraction in the economy in the U.S. We remain in the camp that this is not like the recession of 08-09, where the primary cause was a failure of the financial markets themselves. Markets will remain volatile for the coming weeks, if not months, but we would expect a recovery to begin by the 3rd or 4th quarter of this year. The U.S. economic environment was moving in a positive direction before the crisis. This will be a tailwind as the economy moves into the second half of the year and the outbreak subsides. Those who remain opportunistic are likely to find more attractive prices on investment opportunities created by this pullback. Additionally, those who maintain patience with their investment strategy should be rewarded as we may get a sharp bounce back when the market does recover. Those making short term investment decisions may miss the market recovery as bounce backs typically occur long before any economic data confirms signs of a recovery.


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