MARCH 20, 2020
As we all conclude our first week of sheltering-in-place here in the San Francisco Bay Area, and now mandated for all of California, we want you to know that Waypoint’s disaster response plan has allowed us to be fully functional in all areas of operations, trading, and client service. We are available to talk with you, answer your questions and listen to what is on your mind. We have all necessary information at our fingertips to help put this challenging and unfolding experience in perspective for you. Please do not hesitate to reach out to us at any time.
To help bring that perspective, we want to share our collective experience from past financial crises and provide our thoughts on common questions we are hearing from you.
The government stimulus WILL help.
After an initially underwhelming response to COVID-19 from the Executive Branch, the larger government is coming together in a massive effort to bolster the economy through this crisis. With a strong push from the private sector, Congress and the Treasury have now finally acknowledged that the response needs to be a fiscal solution with an associated mindset of “do anything it takes.” The House and Senate are negotiating an unprecedented initial fiscal solution in excess of $1 trillion, and we should expect the total fiscal spend to be $2 trillion, $3 trillion, or more in the next few months, all financed with long-term government bonds. The purpose of the stimulus package is funding support for affected industries and employees so that shuttered businesses are prepared to resume when we get through the crisis.
You don’t have to agree with today’s leaders, and many do not, but from the financial crisis of 2008 we learned what programs and packages worked to stimulate global economies. Importantly, this time we are not bailing out the banks, but saving businesses from bankruptcy and helping people pay or delay rent and afford food. We know that these efforts will have a meaningful effect in supporting people and industries with the unknown being how long the government will need to do it. That will depend on the steepness or the flatness of the virus transmission curve. This time banks have enough capital to lend and government stimulus is imminent, so we have a good sense of what the other side of the peak looks like. In 2008, we had no clue what was on the other side.
The cash crunch is not your cash crunch.
Some of you have seen “cash crunch” creep into the financial headlines and are wondering if there should be concern with getting cash from your investments. The cash crunch is not your cash crunch. It arose from sellers in the market who, for reasons of using leverage to invest, needed the cash to cover their loans. A scramble for cash then ensued, which put pressure on some money market funds to be able to meet the demand. The Federal Reserve, which is tasked with injecting cash and liquidity into the economy during crises, has basically thrown the kitchen sink at any liquidity problem, dropping interest rates to near-zero and opening up multiple avenues of liquidity to the markets. One of these avenues is a backstop for money market funds, including a guarantee covering the affected money market funds. What does this mean for you? There is no need to hoard cash.
Making sense of today’s markets.
We have now had time to analyze the ‘shape’ of the capital markets over the past four weeks. What we learned is the selling was fueled by leveraged investors like hedge funds, who needed liquidity to meet the collateral requirements on their loans, known as a margin call. These investors were forced to sell at any price and lock in their losses. Conversely, long-term institutional investors (think pension funds) and most individual investors (like you and us) have stayed invested. This is classic market correction behavior. The leveraged investors are forced to panic sell and once the markets are deleveraged, we start to see more rational heads and prices prevail. Thankfully, this time around our banks were not the leveraged investors. Have we reached the bottom? We can’t answer that, but what we can tell you is that investors with a long-term outlook, such as large pension funds, have started to add to their stock positions.
What does this mean in the short and intermediate term?
The current level of the global stock market has “priced in” all the known information. Prices reflect the suspension of parts of the global economy, a spike in unemployment, the expected toll on our healthcare system, and the potential for virus casualties in the hundreds of thousands alone in the United States. What we don’t know is how the public will react to these numbers over the next few weeks and months. The health-related headlines in the U.S. will get scary in the coming weeks as we approach peak levels of infection and the ensuing loss of life for those who are vulnerable. We also don’t know how effective global efforts will be in slowing the rate of infection or what will happen if we make the mistake of lifting our shelter-in-place too soon. Most experts feel that we should start to see relief from the virus by mid-April based on how the virus has peaked and ebbed in Asia. Realistically speaking, that is also an unknown.
In the intermediate term, much like past bear markets, we will see recovery from the damage done to the existing economy. Unlike past bear markets, we will mourn together over the impact on human life and praise everyone on the frontlines who fought this virus. We will get the saplings of a ‘new’ economy just as we did after 2008 when financial services gave way to the technology industry. You can bet on the inventiveness of people to create new opportunities for growth. Likely there will be fewer cruise ships sailing the oceans. We can live with that.
“Not all heroes wear capes. Some wear scrubs.”
We think it is important to focus on some of the encouraging news that is often overlooked when searching for news headlines. We should all acknowledge the “moon shot” level of work that our doctors, nurses, pharmacists, and scientists are doing globally to contain and combat this virus. We have confidence in the ingenuity of the biotech industry in coming up with a solution. Problems that would have taken years to solve over a decade ago, such as mapping the genome of the virus, are now solved in weeks. Antiviral drugs developed for other uses are already in clinical trials with some encouraging findings. Our healthcare workers around the world are selflessly putting themselves in harm’s way, and here in the United States, their work is only beginning. Take time to reflect on their service to the broader community and how we can also be in service to our communities.
Focus on the good.
Foremost, we can help to keep our community healthy by following guidance on how to stop the spread of the disease through frequent hand washing, social distancing, and so on. We can support local shops and our favorite restaurants who are staying open for delivery. We can help each other to keep our sanity by connecting over Skype, Zoom, or Facetime with friends and families. We can seek to help the elderly and underserved. Strangely, in being pushed physically apart, we can be closer together. Importantly, don’t forget to take care of yourself. Take time to exercise, go for a walk, or meditate. Be a source of calm in our homes, communities, and virtual workplaces – that can be contagious too!