ARBOR OUTLOOK: The Fed’s expanded asset purchases: A new paradigm?
"If I ever get a job again ... With my old friends I'll hobnob again; What great fun it will be ... Saying, "Just have one more on me" — from "If I Ever Get a Job Again" as performed by Dick Robertson
A man visits his doctor about a serious ailment. The doctor calls two days later and says, "I've got bad news and worse news." The man says, "Give me the bad news." The doctor says, "Okay, you've got 24 hours to live." The man, shocked and stunned, says, "What could be worse than that?" The doctor says, "Well, I forgot to call you yesterday."
Dark humor for dark times, right? Thousands of Americans are seriously ill or have perished from the coronavirus; some 22 million are unemployed; lines for food giveaways in some cities stretch for miles; and small businesses are going under en masse.
For investors, the most pressing question is, "How can markets rebound while the economy flounders?" Let's consider the Federal Reserve's decision to purchase huge amounts of assets, including virtually everything but equities.
The Federal Reserve's purchases basically establish a floor under asset prices so that there's not a financial panic. Markets would be in far worse shape than they currently are without this intervention. This action represents a major difference between this and past severe economic downturns.
Modern markets are still very much a supply and demand equation. There are only so many publicly traded securities to invest in. So when the Federal Reserve employs huge sums to buy assets, other investors are encouraged to buy as well. Eventually, the link between the economy and markets will matter; right now, not as much.
The economy and markets usually move in tandem. If the economy is good, markets tend to thrive; if the economy is in the doldrums, markets usually trend downward.
Investors ask daily, "How can the Dow be down 'only' 20% when there are millions filing for unemployment and we're approaching what appears to be an economic ice age?" Unprecedented fiscal and monetary stimulus are part of the answer, and the other is the confidence that this downturn represents a short recession.
Still, there are far more questions than answers. When will normal air travel resume? Will many Americans migrate away from densely populated cities and resettle in towns with more open spaces? When will hotel stays and restaurant dining again become commonplace? Will we feel safe in large crowds? And, how long can the economy limp along at half-speed as people slowly eschew social distancing?
Once a vaccine becomes available, we will likely experience a more robust rebound. But the baseline that asset prices bounce off of depends on how effectively we reopen the country in the coming weeks and months.
No one has a crystal ball. But investors need someplace to put their money to work, and I see no reason why the historical trend of rising stock prices and economic growth can’t continue once we’re past the coronavirus slowdown. This too shall pass.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.