Soothing the economic impact of COVID-19: Coordinated central bank policy and more

March 18, 2020 Ian Taylor

On March 15th, the U.S. Federal Reserve cut its interest rate target to 0.0%-0.25% and introduced a quantitative easing program worth US$700 billion to provide relief to the global financial system. This followed the Bank of Canada's announcement on March 14th to cut its overnight rate to 0.75%.

Central banks around the world have injected billions of dollars of liquidity into their economies, buying assets and announcing health and economic stimulus packages. This is a clear indication that central banks are signaling that they will do whatever it takes to support the financial system and prevent the coronavirus (COVID-19) health crisis from becoming a financial crisis.

Providing support and calming the fear

While these efforts will offer some reassurance to investors, they are just one part of the solution.

The number one priority for global policy makers is to calm fears about the virus itself. After a number of missteps, it appears that a global, coordinated response with coherent measures to slow the spread of the virus, prevent the overburdening of health care systems, and pave the way to an orderly recovery of the economy and financial markets is in place.

This, however, will take time.

Global supply chains have been impaired, global travel has halted (as more countries close their borders) and citizens are being asked to stay home and participate in social distancing to stop the spread of the virus. These developments will have a negative effect on the global economy over the coming months.

At this time, financial markets are expecting a virus-driven recession, so it is imperative that policy makers act quickly and effectively to implement measures that — if a recession does materialize — can facilitate a speedy recovery.

Shocking North America into action

It's now being reported that the virus has mostly been contained in China. However, a new epicentre for the outbreak has emerged, as new cases are being reported in Europe at a faster rate than during the peak in China, despite being relatively wealthy with advanced health care. It's likely the strain on European health care systems has pushed North American policy makers into action.

Pandemic-driven shock

We believe that the market turmoil that we're currently experiencing is event driven (the spread of the virus) and has not been triggered by a transition in the economic cycle or an underlying issue with financial markets.

With the global economy having been on good footing prior to the pandemic, we believe conditions are ripe for a quick recovery in both the economy and financial markets once the situation stabilizes.

Protecting portfolios has always been part of MD's strategy

At MD Financial Management, we have taken several steps to protect client portfolios both prior to and since the onset of the virus-driven downturn.

We continue our longstanding approach of providing portfolio solutions that deliver diversification and downside protection consistent throughout the entire market cycle — during times of growth and contraction. Bond markets have performed extremely well over the past decade and have provided some protection from the volatility we are experiencing in stock markets today.

For clients that follow our tactical asset allocation advice, we have adjusted our exposure to stock markets via an underweight to stocks (relative to fixed income and to our long-term strategic asset allocation targets) in our portfolios at this time. We have also taken additional defensive measures in our regional country allocation and positioned our portfolios to benefit further from decreasing interest rates.

Staying defensive for now

While we believe a quick recovery is possible, we will continue to survey the financial landscape for additional evidence of this scenario. The time is not yet right to add to risk assets.

Our team is actively analyzing several indicators for signs of potential stabilization in financial markets, including the actions of policy makers (specifically regarding health care measures and fiscal policy). We are also closely monitoring for stabilization in bond and commodity markets and higher frequency economic data. As is seen by the improving trends in China and South Korea, it is possible with coordinated, aggressive measures to mitigate the initial impact of the pandemic.

The coming weeks will be extremely important for the Canadian and the global economy. Once the COVID-19 crisis stabilizes, the ongoing impact from the extreme quantity of global monetary and fiscal policy should provide conditions conducive of a strong market rebound.

MD Financial Management has more than 50 years' of experience in delivering successful financial outcomes for Canadian physicians and their families. We are confident that our strategies are well positioned to continue to help you achieve your investment goals.

If you are at all uncertain about the current situation, or if you have questions about your portfolio, please reach out to your MD Advisor*.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).

About the Author

Ian Taylor

Ian Taylor, CFA, is an Assistant Vice President with the Multi-Asset Management team at MD Financial Management. He oversees strategic and tactical asset allocation mandates, alternative investment mutual funds and is a member of MD’s Tactical and Risk Allocation Committee.

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