Today I’m going to go a bit more in depth to explain the“Don’t fight the Fed” line you’ve been hearing in some of our weekly emails. (If you aren't currently getting our weekly email updates, sign up here.) Then we’ll wrap up with a Twitter thread from Peter Mallouk for more clarification on why the markets are bouncing back so well.
Listen to Episode 20 Here:
To start, BlackRock is one of the world's leading providers of investment, advisory and risk management solutions. I often use them as one of many sources for investment ideas. They are calling this market: “Ripley’s Believe It or Not!”
From a MorningStar article: BlackRock: Wall Street's believe it or not
Ripley’s, for those that haven’t heard of it, "is an American franchise, founded by Robert Ripley, which deals in bizarre events and items so strange and unusual that readers might question the claims."
"In March 2020 global investors experienced their own “believe it or not” moments, as a global pandemic of historic proportions led to cross-asset price action that was so drastic and volatile, it was truly hard to comprehend. We share those arguments below."
Hard-to-comprehend Market Moves
The market moves the last couple of months have been unlike many have seen in their careers "with many assets experiencing more year-to-date price volatility than what was realized over the entire previous decade."
"In the U.S., equities witnessed their third worst month in modern history, while U.S. high yield bond yields doubled in a two-week interval. Astoundingly, even the “risk-free” U.S. Treasury market was upset."
"Global investors began hoarding cash in record-setting amounts, with money market funds receiving $500 billion of capital inflows over a four-week span. To be sure, the entire financial economy has been inundated with a true 100-year storm."
"This financial panic reflected the unfolding left-tail scenario for the global economy that appears to be an unprecedented halt on a great deal of economic activity. We expect the real-time indicators to translate into stunningly poor (albeit lagged) economic data points in the coming weeks."
"Only a month removed from the end of a long and persistent string of full-employment readings, we suddenly face the highest jobless claims numbers in history. Moreover, the U.S. unemployment rate might exceed the 2008 high, and GDP will likely contract roughly 5% this year, the worst growth since the Great Depression. Fortunately, there is sufficient reason to view this growth shock as temporary."
"So, how much household income will be lost as a result of the current crisis?"
"Based on [their] conservative assumptions, [they are] forecasting that "roughly 50 million workers will miss an average of 11 weeks of work, for a total lost income of nearly $460 billion."
"Fortunately [and this is key], the recently signed $2 trillion CARES Act providing $525 billion of direct household income support should be able to keep aggregate U.S. personal income steady, ultimately supporting consumption on the other side of today’s necessary quarantining."
"More broadly, there is little doubt that without the massive, holistic global policy response that we’ve already witnessed, some far worse real economy outcomes risked becoming deeply entrenched. Global policy makers have been bold and timely in both their fiscal and monetary policy responses, so much so that we see a right-tail scenario brewing for the financial economy in the quarters ahead. Indeed, in February and March alone, global fiscal and monetary policy responses totaled a staggering 11% of global GDP, and it’s highly likely that there’s more policy assistance on the way."
Fiscal and Monetary Policy Measures
"With respect to U.S. fiscal policy, [BlackRock is] convinced that the potency of the CARES Act is being systematically underestimated by conventional wisdom. Nearly all of the targeted categories of the legislation have impressive multipliers associated with them."
This means the benefits/relief will outweigh what would have otherwise happened with no pandemic or shutdown.
"Making some very conservative assumptions about the pace at which this committed fiscal outlay will be recycled over the coming weeks/months, we see at least $1 trillion in spending over the next 90 days – that’s an annual run-rate of more than 20% of the U.S. GDP, which is staggering and unprecedented, and will go a long way towards dampening the growth shock."
To sum this up, in 2020 BlackRock is predicting a 5% decline in GDP and the estimated stimulus that will be spent over the next 90 days will be 20%! The 5% decline may end up being on the low end of the actual decline in GDP, but either way, the stimulus in powerful!
"As far as the Fed is concerned, ...[the] response was [also] truly historic, wholly debunking the incorrect notion that their policy toolkit is finite." (I covered this briefly in a previous email discussing Modern Monetary Theory, which apparently everyone has embraced for the moment.)
"Using conservative estimates on how the Fed will proceed with planned asset purchases and funding programs, [BlackRock sees] the Fed’s balance sheet growing by nearly $6 trillion before the end of Q3, an eye-popping number considering that the total size of their balance sheet was near $3.8 trillion as recently as last September. In fact, the Fed will likely end up purchasing the equivalent of 20% of the U.S. Aggregate index over just a six-month window. This initiative will undoubtedly offer meaningful support for all domestic asset classes, [except] for entities with true existential concerns."
"Moreover, when you add in the committed contributions from other global central banks, the resulting surge in global liquidity is profound. [BlackRock estimates] that by year-end 2020, global liquidity will exceed 40% of global GDP, shattering the previous record and providing critical support for a nervous and heretofore fragile financial economy stunned by the crisis. In short, we think that absent some new shock, the holistic global policy response has likely been sufficient to provide support for most asset markets as the virus evolution unfolds in earnest."
"While the magnitude of this unfolding crisis is truly historic, eventually things will return to a more normal equilibrium, and as is often the case, the markets will lead the way back to normalcy, believe it or not!"
Peter Mallouk’s Twitter Thread
Peter is the owner and CEO of Creative Planning, which is one of the largest RIAs (Registered Investment Advisors) in the country, and here is his thread from May 13:
1/12 "Many argue there is a disconnect between the market and the economy. There is not. Here is why."
2/12 "Yes, the SP 500 is only down about 13% this year and unemployment is very high but note several things: First, the market looks forward. It is predicting things could get better rather than much worse. Second - and more importantly - THE S&P 500 IS NOT ‘THE MARKET’."
3/12 "The S&P 500 is about 505 stocks that are all large stocks and all U.S. stocks. These behave very differently than other parts of the market."
4/12 "Large U.S. stocks benefit from the fact that big companies are often the beneficiaries of small companies struggling or going out of business."
5/12 "Where will the people that used to go to your local restaurants go if they fail? I’ll tell you where: Chipotle, McDonalds and large national publicly traded chains."
6/12 "Where will the people that used to go to local retail stores that were just hanging on now go? I’ll tell you where: Costco, Wal-Matt and Amazon."
7/12 "So let’s look at other parts of the market:
- Small U.S. stocks down 23%
- Developed International stocks down 21%
- Small international down 22%
Current conditions hurt small and overseas companies far harder than big U.S. companies. The market gets that."
8/12 "Let’s look at some sectors under duress, and for good reason:
- Airlines down 63%
- Hotels down 50%
- Movie theatres down 50%
The market gets some of these may make it, some won’t."
9/12 "Other sectors are winners, and for good reason, like Big Tech.
- Amazon up 27%
- Netflix up 30%
- Zoom up 142%
The market gets these are some of the beneficiaries of the ‘new normal’."
10/12 "Bottom line: the market covers big companies and small companies. It covers U.S. companies and international companies. And it covers all sorts of sectors that are reacting differently, and for good reasons."
11/12 "The market is connected to where it thinks the economy is going and different parts of the market are connected to where they think different parts of the economy are going."
12/12 "Don’t get caught up in the present popular narrative that the markets and the economy have nothing to do with each other. Until you see the connections clearly, you will struggle as an investor. And it’s for this very reason the market is so hard to beat."
That was Peter’s bottom line
My bottom line: Between the amount of stimulus and these large, cash-rich technology companies that have not been affected all that much (some are even thriving), we need to realize how much influence they have on the markets, but we especially need to realize the large effect the government has on the economy and the markets! We need to stay the course and of course, don’t’ fight the Fed!