We want to keep you all apprised of the ever-changing environment we find ourselves in at present. We hope to continue to be the voice of reason for you as far as the financial markets are concerned and what we might expect to see in the coming week or two. We provide this update not to cause additional concern or fear, but to try and give you some type of preview of what might happen. We can’t predict the future and no one else can either, but we can provide you with our perspective as we move through this current uncertainty.
As we previously had been saying over the past year, we were anticipating a recession of some type to materialize. Recessions are normal occurrences within market cycles and can typically last between eighteen and twenty-four months. Prior to February, we had believed that this impending recession to be a mild, soft recession with many individuals not even realizing we had passed through one. The market environment we now see is not “normal”. It is what can be referred to as a “Black Swan” event. These are events are extremely rare, can be disruptive to markets, and are relatively unpredictable. The reactions that have we have seen take hold internationally over the COVID-19 virus have now gripped many individuals with fear (and rightly so)- the fear of the unknown and the fear of all the “what if” scenarios that are being thrown at us several times each day.
We could not have anticipated the widespread public panic as well as the government actions that we have seen so far over the coronavirus, but we do anticipate the possibility of more to still come over the next few weeks. Market volatility levels are now in excess of the panic during the 2008-2009 financial crisis. This was a global financial crisis that decimated many households for the years that followed. As many know, the crisis was in relation to elevated housing prices that affect a broad and massive population of consumers. Housing prices declined precipitously and took many years to recover in most markets. It was a widespread, systemic crisis that led to the collapse of many financial institutions. During that crisis, which in our opinion was much worse for the financial system, the government and Federal Reserve pumped funds into the financial system, lowered interest rates, and provided bailouts to different banks and corporations such as General Motors. Between the Fed and the US government, the markets saw capital injections of roughly $4.5 trillion from November 2008 to December 2014, a little over six years or roughly $680 billion per year.
On Sunday (March 15, 2020), the Fed dropped the Fed fund rate to 0% and committed $700 billion to asset purchases. The next day, the Fed committed to over $500 billion in liquidity for the Repo markets. Today, an additional $500 billion was authorized to add to the financial system. We believe these measures are pre-emptive and that the world will face a short-term liquidity crisis due to quarantines, business disruptions, etc. This is an event that we could see the federal government also step in and begin providing financing and bailouts to specific industries. The airlines have already requested nearly $60 billion in bailout funds. Unlike the financial crisis which had systemic issues and needed continued support over six years, this liquidity crisis will most likely only last until the governments let businesses open their doors again, which brings us to the next point. Governments around the globe are continuing to announce nationwide quarantines, with France being the most recent today. The Eurozone also announced today that any non-EU travel is now restricted.
This weekend, rumors began circulating that the government is going to institute some form of at-home quarantine measure. President Trump denied the rumors this Monday (March 16). However, we think the government could institute some type of nationwide quarantine by the end of this week or the first part of next week. This might be avoided however, with all the voluntary closures and efforts made by local governments to stem the spread of the virus.
In our previous update, we had stated that an expectation of over 60,000 cases within the next week or two could occur if we follow South Korea’s population density infection trend. However, contrasting this to Italy, the U.S. would could see around 160,000 cases if following Italy’s trend of the virus in terms of population. Italy is a current outlier in terms of cases relative to population, however Italy has since taken extreme measures now to limit its public’s movement including home quarantine. It is possible the US might follow suit as well as the US cases begin to increase.
In addition to all of this, Congress is also attempting to push through a bill of unprecedented proportions. It is be near impossible to interpret such a bill and understand all the implications given the speed in which it is trying to pass. If panic continues, it could prompt a demand to pass any bill, regardless of the short-term and long-term consequences. If a bill of this type is passed, based on what we can tell at this time, we then believe it could lead the way to some type of at home quarantine order. Please remember: Other countries doing this have allowed access to grocery stores but limit nonessential movements. Specific industries continue to operate and it is a quarantine for people to do nothing other than what is necessary. We feel a bill must pass first before this can be announced. The bill attempts to force many companies to pay employees that are in quarantine, which could then be an option.
The U.S. has the fortunate opportunity to see how other countries have responded and the results of their progress. For example, we now get to see how China has already opened back up for business. As countries begin to exit their national quarantines, we anticipate economic relief will be in tow. If/when a national quarantine is announced, we anticipate the federal government will commit to alleviate the short-term impact of such decision with extreme financing by flooding the markets with extreme liquidity. We would not be surprised to see the government to become a direct lender or even partake in direct cash handouts. The US also likely begin massive testing of the population as well.
We know all this might sound crazy. We actually believe it is as well. That being said, let’s look at the next few months ahead. Once businesses re-open and the economy begins moving again just as it has in China, the economy will now have an immense amount of liquidity that has been poured into the markets. So far, we’ve seen $700 billion of direct asset purchases along with $1 trillion in support for the repo markets. It’s difficult to even measure the size of what else will come, but we would expect it to be massive and rushed. Another proposal just announced today would produce another government package of $1.25 trillion to be coming at some point as well. People and businesses will need liquidity. There is no doubt about that. However, the amount of liquidity that will flood the markets over such a short time frame to alleviate a short-term issue could have an unknown impact. We could see asset prices such as stocks soaring higher once all of this settles out. The question will become how long will markets demand liquidity and how much will be provided. As far as overall liquidity needs, this is more severe than the financial crisis of 2008, however, it is for an extremely short period of time. We do feel as though the Fed and the US government views it as not having much choice other than to act quickly and decisively. In turn, all of the liquidity that floods the markets will be difficult to remove.
When we close our eyes and picture the next three to five years ahead, we believe businesses will again be bustling, flights will be operating, and the “panic” of 2020 will barely be a memory. When we emerge on the backside of this, we will look back at 2020 as being the potential buying opportunity rarely seen in a lifetime. As discussed in previous updates, our moderate risk level accounts have anywhere from 45% to 70% equity exposure limits. Currently, moderate risk portfolios are at around 50%. We still have much room to increase equities/stocks as this panic continues. We believe that opportunity may present itself in these next two weeks, as everyone in America will feel the walls closing-in on them and the liquidity crunch will most likely begin with many businesses having to halt operations.
It will be a dramatic next thirty to sixty days, but we want you mentally prepared for what could lie ahead, especially in these next two weeks. We feel many will see the surge in cases, hear the government announcements, and potentially begin panic selling. We will not be. We understand there is much still unknown, but we are continuing to believe in the valuations we see as generational long-term opportunities once America and the world emerge from this. In our opinion, those who give in to the panic could see detrimental impacts to their portfolios for the decade ahead. We see the next two weeks ahead as our possible “October of 2008”, if the last two weeks haven’t already been. Back in 2008, markets and the public were in the midst of devastating panic. It was also an incredible moment to buy. Yes, the markets continued to fall a bit more until March of 2009, but no one can be sure about the direction of the markets. We can only simply look at the stocks of certain businesses we’re buying and see the immense value we’re paying today, regardless of what happens in the short-term.
If you are personally panicked, that is ok. This is scary. This is now turned into a full-blown panic. It wouldn’t be one if the majority of you reading this didn’t care. And if you are not, we do not want you to panic watching the events as they unfold over the next few weeks. It is now becoming a panic that will rival history books, and it will probably dramatically change the landscape of planning for future outbreaks as well. We also believe this outbreak is able to cause such panic due to the immense amount of media overload. Scrolling through any news source, you’ll be hard pressed to find anything that doesn’t include the word virus. In previous outbreaks, you did not have minute-by-minute coverage or tweets giving you local details. We believe that is partially fueling the hysterical panic we’ve been witnessing. Referencing our previous post, the swine flu had over 60 million estimated cases in the US alone. So far, this outbreak has roughly 190,000 total combined cases worldwide. We continue to not be as concerned with the virus itself, but instead by the immense panic unfolding.
We do believe this is serious, if you are an at-risk individual, be smart. Follow guidelines and good hygiene, just like you should be doing anyhow. If you are not considered high risk, but you are around those who are, be sure to be mindful and practice the same respectful measures. If you have friends or families in the medical field, especially in large cities, reach out to them and encourage them. They will be on the battle lines and see the worst of cases. They will witness the surge of cases and be stretched thin in some areas. But we need them to stay calm to take care of those who need help. In the end, we do not believe that the widespread health devastation that many are predicting will occur. We do not find it justified by any hard data and actual statistics..
We continue to be diligent in these times, and we will continue scouring through the massive pile of businesses that are seeing valuations fluctuate by unprecedented amounts daily due to market volatility. This is not rational. This is a panic. Please take a deep breath and pay attention to the facts and not rumors. Reach out to others you may know that are in need in the coming month. We want our clients prepared for headlines that could be likely lie ahead.
We are here to serve you and support you. We do encourage you to call at any time and also set up an online review via Go-To-Meeting at your convenience so we can review your long-term plan in times like these. We welcome your calls.
Your TEAM at F.I.G. Financial Advisory Services, Inc.