The most noteworthy observation on the financial markets a month and a half into 2020 seems to be the resiliency of US stock markets. No market moving story, and there has been a few of them, can seem to change their trend and direction. To begin the year, we witnessed a US drone strike on an Iranian General that prompted escalation fears between the United States and Iran. For only the third time in history we saw the congressional impeachment of a US president. And of course, still playing out are the unknowns associated with the coronavirus through China and the impact to their domestic economy along with global growth.
Continuing with the coronavirus, it’s been a challenge for the medium to long term investor to make sense of headlines that often fail to put in perspective the extent of the health scare. The point of this blog is not to attempt to join the chorus of global health experts in conjecturing on the breadth of this scare, but instead echo the skepticism for how this pandemic will play out, and whether markets are mispricing the end result.
What has been interesting is assessing the potential economic impact and thus why it was the focus of officials from the Federal Reserve Chair Jay Powell before Congress this week and even Canadian Finance Minister Bill Morneau speaking before an audience in Calgary. As Minister Morneau stated, the Canadian economy will be impacted from tourism numbers to global supply chain, and even resource demand. Canada’s situation in a global economy linked to an increasingly important China is no different from the United States or Europe. Whether this creates a v-shaped decline or is anything negative sustained is the unknown, which speaks to assessing the depths or longevity of this crisis.
With regards to Powell and deviating from the short-term discussion above, it was another comment he made before Congress this week that is perhaps more interesting. In his twice annual two-day testimony Fed Chair Powell came close to questioning whether the Fed had the adequate tools to combat the next recession and called on Congress to play a bigger role in the fiscal side of the equation.
This message echoes and motivates the narrative from many commentators that the ability for the Fed to continue to spur economic growth from ultra-low interest rate policies is coming to an end. An insightful comment was made by Greg Ip in the Wall Street Journal a few weeks back when he mentioned how the US economy has transitioned to be made up of less interest rate sensitive sectors. An aging population has diminished the significance of a rate cut to prompt home purchase or take on auto loans as services and education and healthcare now account for a larger share of GDP.
Phillip Hildebrand, the former head of the Swiss National Bank, and former US Federal Reserve Vice-Chair Stanley Fischer suggested that “unprecedented policy coordination” could be the answer to the next economic slowdown. This speaks to the notion of central banks financing fiscal deficits.
The last six weeks have been an interesting start for the markets in 2020. Geopolitical events to date have failed to unnerve investors from their evermore advancing trade in US equity markets. Events that have been so monumental that they’ve even masked potentially more consequential headlines.