Monthly Brief March 2020 – Determining Future Expectations
Could we be experiencing the unthinkable “this time it’s different” scenario? Certainly, many current market and economic features are similar to conditions seen in the past, but the catalyst of this very complicated current global environment is unique. Rather than disruption in global business causing stress in the financial system, or, financial system problems causing stress in global business, the COVID-19 pandemic has simultaneously ambushed both the global economy and financial system at once.
Typically, global central banks can use monetary policy (e.g., interest rates) and governments can implement fiscal policy (e.g., reduced tax rates) to combat global economic and financial system disruption and potentially stimulate economic activity towards a return to healthy growth. To date, the US federal government and the Federal Reserve have proactively used fiscal and monetary policy through implementation of unprecedented stimulus programs. And, while fiscal and monetary policy actions have been effective in dampening the blow of the current crisis and calming many of the targeted concerns, they cannot directly address the root cause of the problem, which is the worldwide health crisis.
Markets have responded to the uncertainty this pandemic places on corporate earnings power by moving prices lower. With markets now at levels that assume a less rosy path of growth over the coming years, investors are waiting to review quarterly corporate updates over the coming weeks and assess the potential impact this might have on both near-term and long-term results. Certainly, traders may cause further short-term volatility in the market, but investors will be keenly focused on the longer-term implications.
Until there is better visibility into the course of this pandemic, the resolve of policymakers will be tested. But, with memories of having been too reactive during the Great Financial Crisis, we can expect proactive efforts will continue to be implemented to bridge the gap between today’s uncertainty and the promise of recovery.
CHART OF INTEREST – Determining Future Expectations
The current global economic stress and the sharp downturn in global markets have few, if any, historical precedents for investors to use as a comparison. How might we consider the global impact and the future economic path to inform investment decisions? We can start with the broadest measure of a nation’s economic activity, Gross Domestic Product (GDP).
The accompanying chart compares Bloomberg Economics’ Global GDP Tracker to actual global GDP growth. This data is reported each quarter and the “Tracker” has provided general insight into the likely path of future GDP reports. It would stand to reason that investors would find healthy growth to be more attractive than slowing or contracting growth as they assess their expectations of the future value of assets. At this juncture, the market has already responded to the expected slowdown during the first quarter of 2020. But what’s next? This tool and many others will be watched closely to see if future GDP expectations are likely to show further contraction and to what degree. Or, will it stabilize as a base for recovery?
Investors are always looking past today and to the future when assessing opinions regarding the value of investment options, and the GDP’s measurement of economic activity is a core component of the analysis. But what is already known is likely priced into today’s markets, such as the expected sharp decline in Q1 2020. It is forward looking tools such as this one that provide insight into economic and business conditions (and the spread of the current state of the COVID-19 pandemic) that will have significant influence on investors’ outlook and where they take the capital markets from here.
James Ferrin, CFA
Chief Investment Officer
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