A massive tug of war is raging between the Fed and the Coronavirus on a daily basis to influence markets and investor psyche. The economic recovery hinges on consumer spending, which is in turn dependent on a resumption of normal life for people all over the world.
In the U.S., shelter in place and the concept of quarantine is being brushed aside by folks who have been cooped up for three months or more. Last week markets experienced a roller coaster decline of 5-10%, depending on the tracking index, caused by rising COVID cases. Florida and Texas had cases surge a month after relaxing lockdown restrictions and cases are rising in states that opened up only a few weeks ago.
For Fed and government stimulus efforts to take hold and give the economy a much needed boost in growth, people need to feel safe to resume normal activity. It seems we are in God’s hands for now as we get more clarity on the direction the virus takes. As we see it, we need three things to happen to get a positive outcome:
1. Keep it Flat
- We need to make it through the summer and early fall without a significant increase in virus cases and deaths.
2. Fed the Superhero
- We need investors to continue to buy into the Fed’s storyboard, that they can save the economy and by extension the markets.
3. Shots, Shots, Shots
- We need the heroic effort of pharmaceutical companies and the government to give us a vaccine by the Fall that’s safe and works to prevent serious illnesses and death from COVID-19.
In the meantime, protecting capital from large potential losses should be an investor’s first priority. Before we get a clear indication that the danger from the virus has been contained, we would expect significant volatility. Markets will need to digest shutdown-induced economic and corporate profit declines not seen since The Great Depression.
With so much to worry about, we fully expect there to be significant risk to the downside, but markets should enter a new powerful bull market cycle by year end or early next year fueled by massive monetary and fiscal stimulus. This is probably the greatest “don’t fight the Fed” moment in history. With unprecedented stimulus that may exceed 10 trillion dollars when all is said and done, you won’t want to miss the bull market that follows. It ought to be a doozie!
The views presented are those of Don Schreiber, Jr., and should not be construed as investment advice.
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