QE Infinity

Saying “our economy will face severe disruptions,” the Fed announced early today an open-ended commitment to buy assets.

Stocks roiled by virus fears

It will purchase $375 billion in Treasury securities and $250 billion in mortgage-backed securities this week—a near QE Infinity—to support credit markets. That’s on top of last week’s $700 billion announcement.

It will also begin buying commercial mortgage-backed securities. And, for the first time, the Fed will start buying investment-grade corporate bonds in the primary and secondary markets, and through ETFs.

Among its measures, there were a number of other programs, including two facilities to support credit to large employers. It soon expects to announce the establishment of a Main Street Business Lending program.

At this point, the Fed is trying to cover all aspects of the credit markets amid the turmoil being generated by the COVID-19 epidemic.

Yet, despite disruptions in the Treasury, corporate, commercial paper, and money funds markets (and ETFs) we have not had a systemic event nor have markets come close to stress levels seen in the financial crisis. The Fed is desperately trying to stay ahead of the curve.

I wish the same could be said of fiscal policy. Fear of the virus has the economy in a smackdown. The economic uncertainty is enormous, and discounting future earnings is incredibly difficult right now.

Here lies the problem. Markets attempt to price in future events, and forecasts are all over the place when it comes to what will happen next month, Q2, and when we might see an economic recovery.

JPMorgan Chase & Co. expects GDP to shrink at an annualized rate of 14% in Q2, while Bank of America and Oxford Economics both see a 12% drop. Goldman Sachs Group Inc. sees a 24% plunge (Bloomberg).

St. Louis Fed President James Bullard said Sunday night the unemployment rate could rise to 30% and GDP could take a 50% hit. Reality – no one really knows.

Never have we seen such discrepancies! Typically, the range for GDP is about a full-percentage point.

Programs aimed at supporting small and larger businesses are an excellent step in the right direction, and it could save some jobs until demand bounces back.

But will small business owners access these lifelines? How many bureaucratic hoops will they need to jump through? How can apps be quickly processed? How fast can cash be infused into companies that can’t meet payroll?

What looks good on paper must be quickly put into practice.

Capitalism vs government intervention

Though we argue around the edges about the need for regulation, most folks believe in free markets. I’ve met business owners who are Democrats and I’ve met business owners who are Republicans.

They wouldn’t own a business if they didn’t adhere to free-market principles in some form.

But today, even staunch proponents of free-market capitalism acknowledge that intervention by the Fed and fiscal stimulus from the government are needed amid the fear created by an exogenous event–COVID-19.

They do not adhere to a rigid ideology when circumstances dictate, especially when state and local governments are forcibly shutting down businesses.

Yes, intervention isn’t cheap but the bill will be much higher if key industries collapse.

The COVID-19 crisis will eventually peak, people will venture out and spend, and we will see an economic bounce.

Greater transparency on the economy, which won’t be immediately forthcoming, should help. Stabilization of new cases and major fiscal stimulus could go a long way in lending support.

But fiscal stimulus from Congress is needed yesterday. Congressional bickering has to stop. Leave your agendas at home.

Fed Cuts in Response to Coronavirus

In its first intra-meeting move since the financial crisis, the Fed cut the fed funds rate by 50bp to 1.00-1.25%.

Fear spreads faster than the virus

While Powell said, “The fundamentals of the U.S. economy remain strong,” he added, “The spread of the coronavirus has brought new challenges and risks,” and “the risks to the U.S. outlook have changed materially.”

Powell conceded the Fed doesn’t have all the answers – monetary policy can’t address a supply shock nor can it slow the rate of infection.

A fiscal policy (My view: tax cuts/debit cards with an expiration date (if that is possible)) and health care response is needed, but he believes the Fed’s cut will—“provide a meaningful boost to the economy” by supporting business/consumer confidence and interrupting the recent tightening of financial conditions.

Maybe. But a rate cut isn’t enough to aid industries dependent on person-to-person contact.

The market’s reaction: negative. Was the intra-meeting cut a sign of desperation? Inan abbreviated Q&A session following the rate cut, Powell’s remark that he fully expects the economy to “return to solid growth and a solid labor market as well” has me wondering if he’s already seen the February jobs’ report, which is out Friday.

That said, the survey is taken during the pay period the includes the 12th day of the month. That’s in front of the Feb 19 S&P 500 peak.

What’s happening? There is an enormous amount of economic uncertainty being generated by FEAR of the virus, not the rampant spread of the virus. Flu infections far, far, far, outpace what we’ve seen so far from COVID-19.

Uncertain outcomes include:

  1. Will we fall into a recession that sends corporate profits lower,
  2. Will the economy stall before accelerating in the summer or fall, or
  3. Will we only see a modest/temporary slowdown that delays the projected acceleration in profits?

It’s an unanswerable question; therefore, investors shun risker assets.

Recession risk

Clearly it has risen, but action over the last couple of days in some junk bond funds is encouraging. Still, the situation in high-yield debt remains fluid.

We may see a slight bump in consumer spending as some folks stock up on staples, but it’s very difficult to model how much the economy may slow, or whether we may see a contraction in Q2 or beyond.

Hence, the flight out of riskier stocks and into the safety of Treasuries. Is a bottom in sight? Have we already hit bottom? Or we headed into a bear market? Those who know how I approach investing know that I don’t try to time the market. It’s impossible. A well-diversified investment portfolio that’s tailored specifically to your goals and risk tolerance (and other factors) is the best long-term path. Please contact your financial advisor for guidance.

What we do know is that stocks have historically had a long-term upward bias. Volatility and downturns are inevitable, and bull markets don’t last forever. And, for 200 years, bull markets have followed bear markets.

While COVID-19 does appear to be deadlier than the flu, we may look back on this much like MERS, SARS, or H1N1. None received today’s media attention, which may be stoking public fears, and little damage occurred to the U.S. economy.

Lighter note

Masks (assuming they do any good) and hand sanitizers are hard to come by, but there’s plenty of toilet paper at my local Walmart. That’s a good sign we’re not seeing a full-blown panic.