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When Will this Crisis End? 3 Keys to Recovery

May 27, 2020  | by Mark J.P. Anson

COVID-19 | Market Commentary

When will this crisis end?  Following are three key issues fiduciaries should keep in mind concerning COVID-19 and this pandemic recession and recovery.

1

The path and trajectory of COVID-19
This is really the key “unknown.” China and Korea were the first two countries that managed to “flatten the curve.” However, these two nations had/have advantages that most western nations did/do not have: 1) Early recognition; and 2) the ability for the national government to quickly address the crisis through widespread testing and a swift locking/shutting down of society and the economy.

The U.S., the U.K., Italy and other western nations are now coming to grips with the virus but were late to recognize its pandemic potential. However, the Shelter-at-Home and Work-from-Home policies have produced results. We see the curve flattening across most states in the U.S. and other developed nations. We are not out of the woods yet, but the strong and strict government restrictions have reduced the spread of the virus. The key concern is whether there will be a “double dip” of contagion as restrictions are lifted. This is a “known unknown” and will continue to affect consumer, business and financial market behavior until a vaccine is discovered or herd immunity is achieved.

2

Fiscal and Monetary Policy
The United States policy makers have attacked COVID-19 from the land, air and sea—namely, the Fed, Congress, and the White House. They have thrown everything from the kitchen, the garage, and the tool shed at this crisis. Our fiscal and monetary authorities may not be able to control the life cycle of COVID-19 but they are determined to do whatever is necessary to shorten the life cycle of the resulting recession.

First, the Coronavirus Aid Relief and Economic Security Act (CARES), originally $2.2 trillion, and now $2.8 trillion, is the largest stimulus program ever implemented in the United States. CARES has two main objectives: 1) To prevent mass business failures; and 2) To keep people employed or, to replace their incomes through tax rebates and increased allowances for unemployment claims. This package is much larger than the American Recovery and Reinvestment Act that was passed in February of 2009 at the end of the Great Recession. That stimulus package was “only” $800 billion—CARES is more than three times that amount. Likewise, the Federal Reserve (Fed) has put the pedal to the metal. At the beginning of March its balance sheet was $4.2 trillion. As of May 21st, its balance sheet was $7.1 trillion. That is almost $3 trillion of monetary stimulus in 10 weeks’ time—incredible! In fact, the Fed is now purchasing all net new issuance of U.S. Treasury debt. Colloquially, this is known as “monetizing the deficit”—essentially the Fed is willing to purchase whatever new debt the U.S. Treasury issues under the direction of Congress and the White House to fight the COVID-19 crisis.

In addition, the Fed is purchasing debt issued by U.S. corporations – an unprecedented action. Our Asset Allocation Committee labels this new monetary policy “Qualitative Easing” because, for the first time in history, the Fed is directly underwriting the credit risk of corporations to support the economy. Last, the United States is not alone in its battle against the pandemic recession. The European Central Bank has embarked on a $1 trillion spending spree to purchase government and corporate bonds in Europe. Germany has introduced two fiscal packages totaling over $800 billion to help consumers and business affected by COVID-19. In the United Kingdom the Bank of England has engaged in $250 billion of new Quantitative Easing and the government has introduced various bills amounting to over $500 billion in fiscal relief. All told, over 200 monetary and fiscal stimulus programs have been introduced globally in response to the outbreak of COVID-19. Global economies will need every bit of the stimulus firepower that has been unleashed to fight their way out of the deep economic hole this pandemic has created.

3

Consumer, Investor and Corporate Behavior
The last component of our economic crisis is how we, as consumers, investors in the market, and operating businesses, react to the fiscal and monetary stimulus. For the past two months the United States has been operating under government-imposed restrictions on our economic and social behavior: Stay-at-Home/Work-from-Home policies. The speed of our economic recovery will depend upon how we respond once these restrictions are lifted.The easing of these government restrictions will re-start global supply chains and goods will once again flow onto the shelves of both virtual and physical stores.

However, it remains to be seen how quickly consumer and business demand will regain their footing. After restrictions are lifted, it is likely that many companies will continue with some form of Work-from-Home polices and much of the population will likely continue with some level of caution as it relates to venturing out. Simply put, it will take a while to rebuild business and consumer confidence. Consider: when is the next time you might book a vacation on a cruise ship? Or go to a packed movie theater? As a result, coming out of this recession, we will likely have two phases of recovery. The first will be the exit from the Stay-at-Home and Work-from-Home restrictions. This will bring back many workers—but not all—who have been furloughed during the lockdown period. As a result, there will be a surge in productivity as local businesses learn to produce more with fewer workers. Worker productivity will increase faster than the broader economy as the recovery begins. The second stage of the recovery will occur when worker productivity gets stretched to the limit and businesses recognize the need to hire back the rest of their employees. This means that the decline in our unemployment rate will lag the recovery of our economy. How long this lag extends will depend upon the amount of time it takes businesses, small and large, to rebuild their confidence in the strength of our economy.As we analyze each of these three factors, we are encouraged by the progress to date and cautiously optimistic about the future. Prior to the onset of COVID-19 the economy was strong – even if late in the cycle. This downturn, unlike prior recessions, was not caused by some crack in the financial infrastructure. The banking system was solid, central bank policies were measured, and fiscal spending was moderate. Consequently, we are hopeful that the massive government response and eventual rebuilding of confidence will have the economy back on track in the not too distant future. Recessions are painful for all of us. Yet, the best course of action in a downturn is to stick to your long-term game plan and asset allocation. This is not easy but the best way to weather a storm is to stay on course.

Authors

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Mark Anson is the Chief Executive Officer and Chief Investment Officer of the Commonfund and Chairman of the Board of Commonfund Capital Inc. and Commonfund Asset Management Company. Previously, he was the President and Chief Investment Officer for the Bass Family Office of Ft. Worth, Texas which was recognized as Family Office of the Year for 2014 & 2015. He was the President & CEO of Nuveen Investments, and Nuveen Alternative Investments, a full service asset management company with over $250 billion in assets under management. Prior to Nuveen, Mark served as the Chief Executive Officer and Chief Investment Officer for the British Telecom Pension Scheme (BTPS), the largest institutional investor in the UK with assets of £65 billion. In addition, Mark was the CEO of Hermes Pensions Management in London, a £55 billion asset management company that is wholly owned by the BTPS. Prior to joining BTPS, he served as the Chief Investment Officer of the California Public Employees' Retirement System, the largest institutional investor in the United States with over $300 billion in assets. Mark is currently a Trustee for the $65 billion UAW Medical Benefits Trust. He also serves on the Law Board of the Northwestern University School of Law, the Board of the Toigo Foundation, and the Board of Panagora Asset Management. He is the only person to have served on the Board of Governors for both the CFA Institute and the CAIA Association. Mark has published over 100 investment articles in professional journals and has won three Best Paper Awards. He is also the author of five financial textbooks including the Handbook of Alternative Assets, which is the primary textbook used for the Chartered Alternative Investment Analyst program. Mark earned a B.A. in Economics and Chemistry from St. Olaf College, a Ph.D. and Masters in Finance from Columbia University Graduate School of Business, and a J.D. from Northwestern University School of Law, all with honors. He has also received several industry awards in recognition of his leadership in asset management. Last, Mark has earned the Chartered Financial Analyst, Chartered Alternative Investment Analyst, Certified Public Accountant, and Chartered Global Management Accountant professional degrees, and he is a Member of the Law Bar of New York and Illinois.
Mark Anson, PhD, CFA, CAIA
Chief Executive Officer and Chief Investment Officer
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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.