In the latest news from the United States, President Trump is attempting to roll out a new economic stimulus plan soon. It has been reported by the press that details will soon be shared on "very dramatic" economic initiatives. These could include payroll tax cuts, infrastructure spending and additional support for some of the most troubled industries such as airlines.
Meanwhile, the Bank of England has joined other major central banks in cutting interest rates by 50 basis points and offering targeted assistance to businesses and banks. The British government is expected to announce a major stimulus package today. Fiscal support measures are also planned by Italy, with details to come as early as Friday. The additional support is in response to the Italians moving from a regional to a national lockdown earlier this week to minimize contact and person-to-person contagion.
Policy makers around the world are on the move to offset the growing economic pressure generated by the spread of COVID-19.
The problem for governments is to simultaneously minimize the viral spread and the economic impacts of the viral spread. The only way to minimize the spread, or what epidemiologists call "flattening the curve," is to apply widespread social distancing measures and aggressive fencing around infected populations, as evidenced in places like China and Korea. This causes even more economic distress in the short term. Measures that can help limit the initial economic dislocation resulting from the greater health demands seem most appropriate at this point.
All of this is to say that financial markets should remain volatile. Injections of policy stimulus meet episodic economic shocks from the viral spread head on. At the time of writing, the VIX equity volatility index remains high and hovers around 50. This means that stocks are priced for about 3-4% daily price fluctuations over the next month. Government bonds, credit and commodities are moving in a similar fashion to their equity counterparts. Uncertainty remains high.
It's a tough time to keep a cool head, but that's what we need to do. Portfolio construction decisions and an investment process were outlined in advance, knowing that moments like these would be part of the experience. History is replete with examples of volatility eruptions and large asset class drawdowns. There is also ample evidence showing powerful and unexpected counter-trend price movements. It is important to remember that diversification of asset classes within predefined risk tolerance bands has been one of the most reliable ways to achieve a long-term financial goal.
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Until then, stay safe and healthy!