To say that last week was a tough week on Wall Street would be akin to saying Michael Jordan was an okay basketball player. Through the end of the brutal week, the Dow Jones Industrial Average posted a huge loss of 17.3% to finish at 19,173.98. This represents the lowest level for the Big Board since October of 2016. The S&P 500 closed at its lowest level since February 8, 2017. The broad index plunged 15% last week to close at 2,304.92. Meanwhile the tech-heavy NASDAQ ended at 6,879.52, down about 13% on the week.
Speaking of massive volatility, markets are trading on fear which clouds reason, an unfortunate predisposition of our human frailty. We won't deny the pain and stress brought on by our minds, nor the reality that we don't have a definitive end in sight - but allow us to remind everybody that we also have a soul, and faith is a powerful resource to resort to in difficult times.
As advisors, we have always professed to follow fundamental data and rational thought, but these ideas go out the window when we allow fear to dominate our thoughts. The current volatility, we feel, is bordering on irrational territory. We get the uncertainty of what lies ahead, and the enormity and severity of the human and economic impact. We don't know when things will get back to normal; and as I said last week, things will probably get worse before they get better.
The next shoe to drop is most likely in the bond market. Bonds are debt and when income/revenue is cut off it is hard to service debt. The Fed is buying Treasury bonds along with mortgage backed bonds. It is highly likely they will start buy some corporate debt as well. However, they aren’t supposed to take on unlimited risk, so they’ll have to pick some winners and losers in that space. This means risk is currently almost unknown in these markets for the time being. An economy financed with debt works just fine until people raise their hand and say they can’t make the payments on the debt. This is where we are at the moment. Covid 19 is the catalyst, not the problem. Think of it this way, you knew your car was running a little hot, but it was still running. You crashed into something (Covid 19 in this case) and now you look under the hood because the hood needs fixing, and now you see the real engine trouble.
There is a great video explaining the mechanics of what is happening. It takes about 30 minutes, but those whom we have had watch were really glad they did. Click on the picture below to view.
https://www.youtube.com/watch?v=PHe0bXAIuk0&feature=youtu.be
The combined cavalry of the White House, Congress, the Treasury and the Fed have come together in a big way to provide an enormous monetary and fiscal stimulus package. Of course, the government's purse is not limitless, but human frailty is.
Despite Bill Ackman's public meltdown on CNBC last week, this is not the end of days. It's not Armageddon and we're not alone in this pandemic. Our global partners are also doing everything they can to help normalize markets around the world. Last week, the ECB announced a $750 billion euro bond purchasing program as they continue to do "whatever it takes" to recuperate from the economic disruption.
Here are some more of the stimulus highlights we've seen already:
Monetary Stimulus:
- Reduced fed funds rate to 0%-.25% (March 15) - lowest level since 2015
- $1.5 Trillion liquidity facility for repos (March 12) and $500 Billion reverse repo line (March 16)
- Started Quantitative Easing program (March 15) $500 Billion in Treasuries and $200 Billion in MBS
- Commercial Paper Funding Facility (CPFF) started by the Fed, with $10 Billion from Treasury to cover losses incurred in the program (March 17)
- Commenced a new Primary Dealer Credit Facility (PDCF) in overnight short-term loans to Primary Dealers (March 17)
- Commenced a Money Market Mutual Fund Liquidity Facility (MMLF) supported by $10 Billion loss guarantee by Treasury (March 18)
- This morning the Fed announced new programs with include open-ended asset purchases (March 23)
Fiscal Stimulus:
- President signed Phase 1 $8.5 Billion spending bill to cover research and testing of COVID-19 virus (March 6)
- $50 Billion in emergency aid to States and Municipalities (March 13)
- $100 Billion Phase 2 stimulus approved and signed by President (March 18)
- $300 Billion in SBA loans to companies under 500 employees, $50 Billion o airlines, and $150 Billion to other "eligible businesses"
- Phase 3 pending final scoring and approval for $2 Trillion to cover tax credits, $1,200 per person + $500 per child, loans and guarantees to affected private companies, sick leave, and other benefits.
Despite the debate in Washington, we expect a Phase 3 $2 trillion relief package to be voted on in the next few days. Clearly this Administration is doing "whatever it takes," alongside Europe and Asia, to combat the economic contraction and to arrest the number of cases and deaths associated with this pandemic.
This gets us to the existential issue of our capitalism doctrine. Government alone cannot be the source of sustenance of free markets. We all have to pitch in with our personal capital to fill the void in spending. After all, recessions are measured in simple terms of GDP contraction. That means, as soon the coronavirus begins to wane, we need to support our local restaurants, movie theaters and merchants - and we will!
The ultimate question is how long will this last? No one knows for sure.
Volatility will continue - we will get through it.
We are a strong country and we band together when things seem insurmountable. As we did in the wake of 9/11 and every other time throughout history, we will prevail this time with the same resilient unity.
This is not the end of days. As you spend time with your family and calmly process the reality of this modern pandemic, feel free to call us with any questions about how we're positioned for this volatile time. There will be opportunity ahead and we are positioned with some cash to take advantage of it.
Stay home, wash your hands, and have a safe week!
Warm regards,
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March 23, 2020
