March 19, 2020

Good morning,

We see this as a “9-11-type” event – an exogenous (outside) event that no one expected and came on very fast, people got scared, changed their behavior and pulled back.  There seems to be several parallels here.

The short-term damage to the markets is locked-in, so how can we avoid long-term damage?  We need support from the Federal Reserve for monetary policy, and from Congress and the Trump administration for fiscal policy, that will limit damage and restore the U.S. economy.  Currently, we have both.  The Federal Reserve’s FOMC (Federal Open Market Committee) has lowered a key interest rate to near zero and injected 100s of billions of dollars into the economy, and vowed to do “whatever it takes.”  Congress, working with the Treasury and the Administration, are enacting stimulus packages – the first of which is in the neighborhood of $1T – intended to provide financial support for individuals, small businesses and major corporations.  The airline industry, for example, has requested $50B in order to survive.

It appears we are now doing what we need to do to contain or at least slow the spread of CV.  But as more and better testing coming on line, the numbers of those affected are likely to increase and maybe dramatically.  That is to say the numbers will get worse before they get better.  China reached “better” within two months and saw a dramatic recovery in their stock market.

As for the markets, stock valuations are at a five-year low.  While short-term market fundamentals are eroded, intermediate and long term fundamentals remain solid.  From a technical viewpoint, stocks are dramatically undervalued which has created a significant buying opportunity for some investors.  But fear and even panic keeps others selling.

We believe we come from a good place in a very bad situation.  First, the U.S. economy was reasonably strong when the CV was first recognized, and economic risk controls are being put in place.  Second, we now understand the cause and are taking action to slow the spread while vaccines and treatments are being developed.  Lastly, the U.S. has the full support of the Federal government to limit the damage to only the short-term.

Eventually, and probably sooner than later, the damage to the economy will be over.  The public will recognize that and demand for goods and services will resume at normal levels.  And the financial markets will recover and move on as they always have.