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Investing for a Bright Future

We are poisoning the economy to save it, and it is the right thing to do.

Our first priority is slowing/stopping the spread of the COVID-19 virus and social distancing acts like an economic “chemotherapy”. Closing businesses and spaces where people gather is a drastic measure, but a necessary one. In the end, it will go a long way in helping us stamp out this outbreak. An important secondary priority is supporting the economy through this period of harsh treatment.

We will get to the other side, but how much damage will be caused in the process? How many jobs will be lost? How many businesses will close? What will be the downstream effects of both of these things? As difficult as this period will be, we are doing many of the right things to reduce the damage. One of the lessons of the Great Recession in 2008 was that we moved too slowly and the programs implemented were too small. It is clear those lessons were taken to heart.

As difficult as this period will be, we are doing many of the right things to reduce the damage.

The actions and programs announced by the Federal Reserve (“the Fed”) thus far have been aggressive and robust. The Fed reduced the Fed Funds rate to zero shortly after market volatility began. Although the practical implications of reducing the Fed Funds rate to zero are limited, the move sends an important message to markets. It says that the Fed is engaged and committed. Since reducing rates, the Fed has been very active to ensure that markets operate effectively, including being the lender of last resort. On Sunday, the 22nd of March, the Fed announced unlimited buying of bonds: treasuries, agencies (mortgages), corporates, commercial paper and consumer debt (student, car, credit card- basically a revival of the old TALF program from 2008). They also said to stay tuned for a direct lending program to small businesses.

That’s the monetary policy side of the support for the economy, which comes from the Fed. The Fed’s tools tend to be blunter, and less targeted. The other side of the support for the economy is the fiscal side, essentially government spending. The biggest concern with the current situation is the possibility of high levels of unemployment. Despite the rancor in Washington, Congress is very close to passing a package of spending that will be targeted at limiting the amount of unemployment that will result from the virus disruptions. This is important because most small businesses cannot operate without cash flow for much longer than a month. The details are still being finalized, but the final spending package will likely include checks to individuals, low interest loans for small business with a forgiveness feature if layoffs are limited, tax benefits for individuals and business, and targeted support for impacted industries. The overall size of the package is likely to be in the trillions of dollars.

The size and speed of all this economic support is encouraging. There will be long-term effects from this government spending, but now is not the time to worry about spending. Now is the time to rescue and repair the economy. The private sector will drive growth in the next business cycle. We can improve government balance sheets then and we should.

The situation with delays in CDC testing was unfortunate, and we lost precious time. Testing is increasing, however, which will allow us to more thoughtfully approach what regions need to be quarantined, who needs to be quarantined and when the quarantines can responsibly be relaxed. Relaxation of the limitations on movement will come once we have slowed the spread of the virus to levels that our health care system can handle.

Now is the time to rescue and repair the economy. The private sector will drive growth in the next business cycle. We can improve government balance sheets then and we should.

Again, as a society, we are doing many of the right things. We are aggressively working to slow the spread of the virus. We are aggressively supporting the economy through fiscal and monetary policy, and the financial system is receiving strong support from the Federal Reserve.

What does all of this mean for investors? Researchers have studied investors during times of volatility and crisis. According to the studies, most investors exhibit three characteristics: 1) a feeling of lack of predictability and control, 2) limited opportunities to reduce stress, and 3) a perception that things are getting worse. All of this results in reducing our ability to see the long-term. We grow nearsighted and myopic. If all of this feels a little too familiar, you’re not alone. In fact, you are very normal and are exhibiting all the same characteristics that investors have exhibited during past periods of market turbulence.

If we can look past this current bout of volatility and economic weakness, and we have good reason to do so, given the tremendous support coming from governments and central banks, it will be helpful in avoiding some of the mistakes that investors have made in the past. Keep in mind that we will get through this. One of the biggest risks we face as investors- missing the upside that will eventually come- is completely avoidable by staying invested.

If you have any questions or if you just want to talk (talking helps!), call us. We’re here to listen and to help guide you through the uncertainties that are a normal and natural part of investing for a bright future. 

About the Author

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John Cunnison, CFA
Vice President
Chief Investment Officer

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