March 16, 2020

Spending vs Investing

With the introduction of the stimulus pack designed to combat the impact that individual and institutional self-quarantine actions are causing, the move will try to replace income, but what effect will it have on discretionary spending is the new unknown. Discretionary income, as we all know, the fuel the drives the domestic economy in addition to the domestic social mood, is the dominating contributor to total GDP. But the questions an armchair economist, such as myself will ask, does stimulus cure anxiety, and if not, what does that mean for the markets? The point is the widespread concern of the virus could very likely linger longer than it takes for the broad indexes to reach the bottom of the recent trounce.

The Markets
After last week the broad indexes came into today having recouped much of the week’s losses in Friday’s rally. Although today the said indexes are giving all those gains back, it’s worth noting that the recovery rally on Friday was as disruptively volatile as any of the preceding declines, thereby suggesting a market recover, when it happens, will be as difficult to measure as the hyper volatile declines have been. Back to the markets, while by all appearance much of the selling came courtesy of our algochums there was enough selling on the part of the financial services industry that has more to do with calming anxiety than posing much strategic intent. In the meantime, the moves to put cash to work are selectively being balanced with sales to remain cash steady. While opportunities are present, even when the crisis moderates and subsides, investors may not believe it immediately and wait. That’s when observance and discipline will realize good opportunities.

The Economy
On Friday Congress passed a stimulus package that was aimed at providing capital to workers and industries strapped by the virus and maybe also calmed most investors, whether living or machine. What this implies is that stimulus schemes, as with other packages in the last twenty years, are designed to battle an unknown. Namely the closure of the economy to the extent seen in the past few weeks suggest a clear path to economic moderation. Does that imply a recession, numerous Wall Street institutions are suggesting so? But coming off the fourth quarter of 2019 with GDP at 3.1% the amount of decline would have to include, droves of public and private employment layoffs and a strong pullback in consumer spending both of which are unknowns, as of this update, waiting for some clarity in next month’s releases of economic data. In the meantime the move toward stimulating the economy is coming fast and includes emergency paid leave for the sick and unable to work, expanding the access to food assistance programs that are historically  effective stimulants to the economy, free testing for the virus and increasing the affordable access to the medical community by calling on insurance providers to reimburse coronavirus patients for any non- covered costs. The bill passing is the result of some bipartisan changes that are more aimed at managing the timing of the programs so as not to turn anything into an open ended entitlement. This is important because it focuses on the crisis at hand and suggests growing understanding that while the virus is likely to spread, there will come a point when it begins to shrink. If the stimulus package can hold off economic moderation in the meantime, the eventual return to work will do the rest. For now, the Federal Reserve did their own damage by lowering rates over the weekend. As a point of reference, when I entered the industry in the 1980’s it was far more common for the Fed to not only make rate decisions on a weekend but not publicly announce their actions. In my opinion, while I welcome action by the Fed, I can’t help disagreeing with a move that is too suggestive of panic than discipline. Today’s market activity is more evidence of that sentiment then any measurable change in the growth of the virus. Believe it or not, I’m tracking that too.
External Events
I also consider the speed at which anxious investors start investing again should have negligible impact on the enthusiasm they will more likely exhibit in spending their discretionary capital. Following the comparable broad index declines back in 2001 and 2008 show a clear pattern in the slow reinvestment process. Indexes such as the NASDAQ which between 2000 and 2002 saw a drop of over 75% below its highest value over 5000, it then took until 2015 to see that level again. In 2008 the familiar Dow Jones Average dropped over 50% between 2007 and 2009 and did not return to its previous record high until 2012. In each situation anxiety garnered from the magnitude of the decline resulted in the often misunderstood, but nonetheless common investor behavior which prompts anxiety to fuel fast decisions to sell and procrastinate around decisions to buy. It’s much like weathering a storm filled with thunder and lighting, when it stops everyone doesn’t just get back to work, they wait around first to make sure it’s over. As the story that surrounds the coronavirus, such as that which revolves around political divide, there remains the likelihood of further market disruption that may occur even as the economy moderates less than expected. Neither a reason to buy in too fast, nor a reason to jump out too impulsively, only a reason to remain patient.