Listen to Mr. Churchill

Capital Market Comment
March 23, 2020
Frank Mastrapasqua, Ph.D.
Principal, Chairman & Chief Investment Officer

“If you’re going through hell, keep going.” Winston Churchill

The pandemic panic was vivid last week, with record volume and an acceleration of the market selloff that began after the market peak on February 19, 2020. The government-imposed economic shutdown caused by COVID-19 crippled business activity in the U.S., and continues to do so. The actions of other governments around the globe produced similar conditions.

Forecasts are abound about the steepness, duration, and magnitude of the decline, but it will be some time before the impact will be determined. At the same time, judgements, which vary widely, are being made on the nature of the recovery.

The difficulty is assessing conditions and responses when there is no clear visibility as to how long the government’s “heavy hand” will remain. The first phase is expected to end at the end of the month (another week). Most likely a second phase, which might be less burdensome (but there are no guarantees), will emerge.

From the perspective of the financial markets, the question is “Have we passed the peak of maximum uncertainty?” Although it is difficult to determine, we do know that significant policy steps have been taken over the last two weeks and others are forthcoming.

Massive stimulus policies have been unleashed. On the monetary front, the Federal Reserve has moved aggressively in multiple ways. It has lowered rates again to 0.00 – 0.25 basis points for the federal funds, a decline of 1 percentage point. There are now no reserve requirements, and the Fed has provided broad access to the discount window, with loans up to 90 days. With the support of the Treasury, liquidity is being provided to the commercial paper market, backstopping money market funds.

At the end of last week, pressures in the fixed-income market emerged. Municpal bond and ETF funds saw major outflows ($12.6 billion) and rates rose sharply. It became difficult for municipalities to raise capital and for funds to get rational pricing. The monetary authorities have stepped in to provide support to the muni-funds and the market started to stabilize on Friday. Moreover, bond funds were selling at a discount to their net asset value.

Another segment of the fixed income market that is under extreme pressure is collateralized loan obligations (CLOs). As investors searched for yield, Wall Street created funds that packaged junk debt, but garnered a high credit rating.

The dysfunctional nature of these market segments became very apparent in a world with a panic mentality. It is times like these that the inherent weakness in many product structures becomes apparent and costly to investors.

The Fed is moving aggressively to restore order and liquidity to the financial markets. QE4 is well underway and is being expanded to include purchases of assets other than government- and mortgage-backed securities. This easing is going to continue until the market begins to function normally.

The Fed is performing its primary function to be the “lender of last resort.” Central banks around the world are moving in sync with the Federal Reserve, particularly the all-important European Central Bank (ECB).

As monetary policy is moving quickly, fiscal policy is now into part three of the plan. A massive stimulus bill to bridge the gap for families and businesses particularly hurt by the COVID-19 and the shutdown is likely to be in the trillions. It is being formulated and should be passed shortly. Delay in passage will only add to market volatility. The greater the clarity, the sooner the pressure on the financial markets will ease. If one dares to look beyond this chasm, the amount of monetary and fiscal stimulus that is being unleashed on an economy that has been temporarily shut down will generate multiple and enduring benefits.

 

 

 

If you have a question or need further information, please contact:
Don Keeney, CFA, CFP, Principal & Portfolio Manager in Nashville at 615-866-0882, or don@mcapitaladv.com
Claude Koontz, CFA, Principal & Portfolio Manager in San Antonio at 210-353-0519, or claude@mcapitaladv.com

Mastrapasqua Asset Management, Inc. does business as M Capital Advisors.

104 Woodmont Boulevard, Suite 320
Nashville, TN 37205
615.244.8400

200 Concord Plaza, Suite 500
San Antonio, TX 78216
210.353.0500

© 2020 Mastrapasqua Asset Management, Inc. All rights reserved.
The information and opinions contained in this report should not be treated as fact or as insight that will produce desired investment results over time. Investment conclusions always bear risk, and that risk may not be reasonable for any particular reader. Obviously the writer, even assuming good intentions, does not know of the reader’s particular financial circumstance and therefore is not able to assess the propriety of whether a named security makes sense as part of a given individual, family, or institutional portfolio. Mastrapasqua Asset Management clients may, from time to time, own some of the companies mentioned. We hold out no duty to give readers of this column advanced notification of when we may change an opinion. To our knowledge, none of the information contained in our column would, when it becomes publicly available, have an influence on the valuation of a particular stock. Investors should receive investment advice based on an assessment of their own particular investment circumstances and not on the basis of recommendations in this report. Past performance is not indicative of future returns.