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The President’s March 31 daily update on the Covid-19 virus included a sobering comment that we should be prepared for two difficult weeks.  Yes, that seems to be bad and even unnerving news, but the silver lining could be that the virus impact may be in the process of peaking out, at least in the New York City area. Getting past the high point of the curve and reaching the downside will be very encouraging to all.

In our previous e-mail communiques, we have focused on the immediate need and a constructive outlook for the future. This one will be different. We will lay out the four essential elements for recovery and our view as to where we are as far as the progress toward accomplishing each of them.

1)     Monetary Policy – This is the realm of the Federal Reserve (Fed). We can check this box because the Fed has committed to unlimited QE (money creation) to deal with the crisis.

This morning (March 23) the Fed announced that they will provide “unlimited QE.”  This means that whatever the government wants to spend to combat the effects of Covid-19 will be backstopped by the Fed. In the 2008-2009 crisis, the world was shocked when they added $3.5 trillion to the balance sheet through QE. Now that seems like “small potatoes” in relation to what they are presently doing.

This may be the attitude of people regarding the promised government stimulus currently estimated to be $1.2 trillion with more indicated beyond that. This mind-set has been putting continued pressure on the economy and the markets. The fact that it is beyond rational makes no difference when fear is the driving emotion. Of course, it would be very helpful if the government would stop the talking and begin distributing the stimulus money – people want to see it, not hear about it.

The markets are behaving as though we are facing the bubonic plague of the Middle Ages which killed between 30% and 60% of all Europeans. Covid-19 is very serious and should not be taken lightly, but it is unlikely to decimate the world’s population. The medical experts seem to be saying that, like most viruses, it will cycle through in a few weeks to a few months. It is dangerous and there have been and will be fatalities, especially among the medically vulnerable, but as a nation and a society we will survive and recover.

Both years have witnessed sharp market selloffs and fears being turned into panic. But the differences are greater than the similarities. In 2008 there was a financial crisis and the financial institutions themselves (the backbone of the financial system) were in jeopardy. Central banks and government policymakers were totally inexperienced and unprepared to deal with the problem. Consequently, it took a long time for them to come to the point of effectively combating the crisis.
           

On top of having to deal with Covid-19, we are now confronted with an oil-price war between Russia and Saudi Arabia. Normally, a sharp drop in oil prices is celebrated as a great thing. However, these are not normal times and since the US is the world’s largest energy producer, there are concerns about the health of the oil shale industry. There are many jobs in this sector which is a major concern. This helps to explain the highly volatile market today. Nevertheless, a drop in oil and gasoline prices will be a big benefit to lower end consumers which is good for the economy.

We have been experiencing almost unprecedented volatility in the world’s stock markets. The last week of February saw a 10+% market decline and March 2 saw the largest one day market gain (in terms of Dow points) in all of stock market history. The questions are: What does it all mean? And where do we go from here?