I started my career trading foreign currency options on the floor of the Philadelphia Stock Exchange. A trader approached me on the trading floor and let loose with the following: “A stock is just a bundle of information masquerading as a security.” When I was finished scratching my head, I asked him to elaborate on what he meant. He said stock prices contain information about the company’s industry, its supply chain, customers, the regulatory environment, and quality of management. Basically, anything that has any relevance in determining the firm’s growth prospects and future profitability.
So, what are stock prices telling us today? The news does not appear to be so good. The coronavirus has infected the global economy and injected an enormous amount of uncertainty into financial markets. This crisis scenario is different than others such as the bursting of the dot-com bubble and the subprime great recession. What we are seeing here is a supply chain shock. For the past few decades, via globalization and technology, companies have embraced lean manufacturing techniques and have fragmented their supply chains globally in order to reduce costs, gain closer access to end markets and resources, and minimize the impact of regulations. There are ways that fiscal and monetary policy can be used to offset the impact of today’s crisis. It is likely, however, that they are different than what worked in the past.
Historically, the front line in combating recessions was the Federal Reserve. The traditional tools of monetary policy, interest rate reductions and quantitative easing, were often enough to soften the blow from a downturn in the business cycle. They work because they act on demand. Lower interest rates make major purchases less expensive and reduce borrowing costs for companies. This one-two punch can boost demand enough to expand economic growth and get the economy back on track. In today’s economy, I suspect these tools will be less effective. Interest rates are already at historical lows and businesses won’t spend money, regardless of how cheap it is, if there is extreme uncertainty and their supply chains are fractured.
Where the Federal Reserve can help is in making sure that the financial system is flush with cash and they are prepared to relax regulations if the market climate deteriorates meaningfully. In my opinion, the real heroes in minimizing the economic damage from the coronavirus will be the federal government and all of us. The federal government needs to aggressively fund vaccination research and development, prepare triage centers and emergency response teams, and ready fiscal policy in order to inject some spending into the economy. I think this would be a particularly good time to pass legislation to fund a meaningful investment in our country’s infrastructure. In addition, the government should take steps to minimize business failures in the industries hit particularly hard hit by the disease. These actions should extend to the small businesses that are the heart and soul of the communities we live in. The portfolio of responses could include things like tax holidays and targeting spending towards those who need it most. The social safety net should be particularly robust when it comes to helping those who are sick or who lose their jobs.
So, what do we do? For me, at the individual level, it is about preparedness and not about panic. This virus is the poster child for why everyone should have an emergency savings account. The government should give consideration to treating emergency savings like retirement and allow us to contribute to the account pre-tax. Both types of accounts should be portable as well. They should automatically get configured when someone reaches adulthood and we should have a choice of custodian and not be hostage to employer solutions. Companies should be incentivized to match contributions and individuals should default into well-crafted, customized, and low-cost asset allocations that are appropriate for each account type and age group.
The information and opinions above are intended for general information purposes only and should not be regarded as a complete analysis of the subjects discussed or construed as specific investment advice, or a recommendation. Rob Cavallaro is the Chief Investment Officer and Chief Product Officer at RobustWealth®. Robust Wealth® offers goal-based investing and provides the ability to participate in centrally managed, algorithm-based investment models made available through Robust Wealth’s web-based, interactive Platform.