Governments, corporations and individuals struggled again this week as the world worked to find a balance between protecting public health and managing the economic consequences of providing that protection. Almost no one has witnessed the wide sweeping dislocation we are currently experiencing. It is very difficult to predict how long the measures taken (social distancing, restricted travel, and shuttering all but essential services) will be in place. The profound interruption of daily life on a global scale will have significant short-term economic consequences. As we have indicated from the beginning, we are assessing the economic and investment consequences of COVID-19 in the same way we would a natural disaster – sudden, severe and temporary. We are encouraged by the response of central banks and governments worldwide.
- On the monetary policy front, the Federal Reserve, Bank of England and Bank of Canada have slashed short term interest rates and provided enormous liquidity to the fixed income markets through open market purchases. The other major central banks (European Central Bank, Bank of Japan and People’s Bank of China) have also taken major steps to provide liquidity as well as measures to protect the integrity of the global banking system. These actions will bolster the confidence of the global financial markets.
- Fiscal policy, on a global scale, is the new “big gun”. Practically, all major western governments have pledged to vigorously support their local economies. This will be achieved through direct subsidies to affected workers, support for small and medium sized businesses, and de facto backstops for systemically important large corporations. The arrival of massive fiscal stimulus combined with continued accommodative monetary policy ensures that global economies will recover when the public health threat subsides.
- Historically, the anticipation of a global recession has resulted in broad equity market corrections of 20% to 30%. The breathtaking speed with which the action to slow the spread of COVID-19 has arrested global economic activity has spawned an equally breathtaking re-pricing of financial assets in just a few days. If we look at the MSCI All Cap World Index ETF (NASDAQ: ACWI) as a proxy for global equities as an asset class, its 28% year-to-date decline would suggest that a recession has already been factored in and that perhaps we are reaching a floor to the downside.
- Market corrections are stressful for all participants and the severity of the current correction is particularly trying. Multi asset portfolios that are allocated across a number of global asset classes provide the best combination of downside cushioning and exposure to the upside of an inevitable recovery. To be sure, the swift decline in equity markets has significantly reduced portfolio values from the beginning of the year, however, the process of re-balancing will eventually restore your portfolio balances making balanced portfolios the most effective investment strategy under current circumstances.