In a surprise move last night, the Federal Reserve announced it is dropping its benchmark interest rate to zero and launching a massive $700 billion quantitative easing program – measures to ensure financial system liquidity and proper functioning. This aggressive action from the Fed comes after President Trump declared a national emergency, freeing up $50 billion for states and U.S. territories to deploy and assist Americans affected by the shutdown in large swaths of the economy. Congress has already approved $8.3 billion in emergency spending to curb the pandemic’s spread and is currently negotiating a second coronavirus response package designed to provide relief to consumers and workers affected by the global economic crunch.
With the U.S. stock market now in a bear market, the focus on Wall Street in the weeks ahead will be on how the coronavirus can be contained and how severe (and how transitory) the economic damage will be. The public health crisis and the new “stay at home economy” have all but ensured the U.S. economy will contract for a period, most likely at least the second quarter. However, economic growth should resume when things return to normal, particularly in response to large monetary and fiscal stimulus policies, as well as significant measures to “flatten the curve” of the number of coronavirus cases.
History shows that not all bear markets signal a recession, defined by two consecutive quarters of negative growth (see chart). Additionally, the depths and causes of recessions are not uniform. The 2008-09 recession was brought on and made worse by a financial crisis, resulting from speculative assets impairing thinly capitalized banks – conditions not present today. Whether the U.S. does fall into recession this year is less important than how quickly and robustly the rebound occurs. It is important to remember that the economy was on very solid footing before COVID-19, and to the extent activity slows substantially, the reason for the slowing is an exogenous shock, not a typical self-reinforcing cycle downturn.
At times like this, it’s important to keep your financial goals in mind, resist the urge to sell investments out of panic, and stay focused on the long-term merits of investing. Investors who recall the financial crisis 12 years ago remember that as uncomfortable as it was, companies they owned found their footings and stock prices eventually recovered. Peloton continues to believe in the long-term fundamentals of the economy. Our research continues to find selective and attractive opportunities within “accidental high-yield stocks”, fast growing technology and healthcare companies with strong balance sheets. While no one rings a bell at the bottom, we think certain stocks offer an attractive entry point for those with a time horizon beyond the end of this crisis. If you believe, like we do, that the COVID-19 outbreak has not permanently impaired the long-term operations and growth prospects of great companies, prices are very compelling at these levels. As difficult as it is, this is a prudent time for investors to be building positions.