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“Fog of war” drives move to cash

MAR. 17, 2020
  • In the absence of clarity, investors are flocking to cash. Equity markets are set to open down nearly 10%, continuing the excessive volatility as we are clearly in the “fog of war.” The selling is remarkably indiscriminate, with gold (traditional safe haven) down 3% today and 13% in the past week, Bitcoin down 15% and WTI crude below $30. The dollar index is lower after spiking higher last week. Within the equity market, “cash is king,” with large multinationals with strong balance sheets holding up, while small caps, financials and cyclicals collapse. The unprecedented global government action and resulting economic impact makes it difficult for risk assets to establish a bottom.
  • The probability of recession has risen to greater than 50% and likely to increase as the solutions become more restrictive. CDC now recommends cancelling any gathering of more than 50 people for the next eight weeks. Corporate managers are worried that the concept of “social distancing” could go from disruptive to catastrophic as supply chains are choked. Current economic releases are showing some deceleration, but most do not account for the more severe impact from the past two weeks, so are of limited value. Nationwide Economics expects a sharp deceleration in second-quarter growth (-4.5% to -5.0%) in response to the shock. If the outbreak begins to abate by summer, the third-quarter would probably be modestly negative with a fourth quarter and 2021 rebound.
  • The Federal Reserve cut the fed funds rate by 1.00% to 0-0.25% on Sunday, while committing to purchase at least $500 billion in Treasuries and $200 billion in mortgaged-backed bonds. The Fed also extended the discount window for banks and coordinated action with foreign central banks to boost liquidity through dollar swap arrangements. The cut is aimed at providing Treasury market liquidity but is unlikely to support risk assets or easy fears on the economy. True stimulus will likely come in the form of fiscal policy, similar to Germany’s decision to make $600 billion in credit available in business loans. The International Monetary Fund (IMF) also pledged $1 trillion in lending capacity.

Other Topics

  • The uncertainty experienced by investors and consumers is also being felt by CEOs and CFOs. Several U.S. banks announced the suspension of share buybacks through the second quarter after the Fed cut rates and encouraged banks to use their capital and liquidity buffers to support lending to households and businesses effected by the outbreak. The voluntary action avoids the potential that regulators would compel them to do it.
  • Comparisons to previous outbreaks and market shocks is growing increasingly difficult because of the unprecedented response. It is important to note, however, that many of the excesses experienced during the financial crisis are not evident here, and most experts are confident that (while extreme) the impact will be temporary.

What to Watch

  • With the Federal Reserve conducting an emergency cut on Sunday, the drama expected during this week’s FOMC meeting has diminished. Economic data is of limited value because of the lag, but data include retail sales, industrial production and JOLTS job openings Tuesday, housing starts on Wednesday, leading indicators on Thursday and existing home sales Friday

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  • This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.

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