Here Comes the Stimulus

For the past couple weeks, stocks have dealt with the increasing likelihood of recession resulting from the societal efforts to contain or slow COVID-19 in Europe and North America. Now, the same governments are trying to ride to the rescue. Just one week after announcing £50 billion worth of help, the British government announced an additional £350 billion in business lifelines, loan guarantees and tax relief Tuesday. Several European nations, including France and Germany, have also unleashed billions of euros in fiscal stimulus and effectively suspended the EU’s debt rules. Not to be outdone, US Treasury Secretary Steven Mnuchin and members of Congress have spent this week batting around somewhere between $850 billion and $1.2 trillion worth of tax credits, direct payments and provisions for businesses impacted by containment measures. Without having any specifics or actual legislation to assess, a deep dive on winners and losers is premature. For now, we think it is important to simply acknowledge the massive wave of liquidity lurking and help investors set reasonable expectations on what it can—and can’t—do.

First and foremost, fiscal stimulus can’t stop the economic consequences of closures, outages and interruptions to business. Like monetary policy, it can’t reopen the stores and restaurants that have closed either voluntarily or due to local emergency restrictions. It can’t end the shelter-in-place order affecting the San Francisco Bay Area. It can’t heal the sick, reopen schools or return people to the workforce. Most importantly, it can’t force COVID-19 to fade with flu season a month or so from now. Only when COVID-19 fades is life likely to start returning to normal. That will happen when it happens regardless of how much stimulus governments load into their metaphorical bazookas.

So governments and central banks aren’t saviors. But crucially, the global economy and markets don’t need a savior. Not because of anything unique about this bear market, but because cycles turn with or without stimulus. Stocks move in advance of economic data, and many bull markets have begun long before data improved. The last bull market began in March 2009, when data and corporate earnings were awful, unemployment was rising alongside bankruptcies and most of the world was contracting. The recession didn’t end until that July—and data revealing those green shoots didn’t come out until late summer and early autumn, nearly six months after stocks bottomed. Stocks don’t wait for improved data. All they need is sentiment becoming overly pessimistic, creating an easy benchmark for a not-as-bad-as-feared reality to beat.

Now, you might rightly argue that by the time stocks bottomed in 2009, governments and central banks globally had announced trillions of dollars worth of stimulus. Fair enough. But think a few years ahead, to 2012, when the eurozone was in the grips of its sovereign debt crisis and a recession that began in 2011. There was no stimulus then. Instead, governments throughout the currency union were enacting austerity—the opposite of stimulus. Yet eurozone stocks recovered anyway, well ahead of an economic recovery that began in Q2 2013. A jump start might have helped, but it wasn’t necessary.

The stimulus measures announced this time likely bear most of their fruit in the months after businesses reopen and life gets back to normal. This is when the loan guarantees and funding lines for cash-strapped businesses will help them get over the initial hump after weeks (or more) of lost revenue. Judging from Mnuchin’s comments Tuesday, this is also likely when tax credits will hit American households. The 90-day grace period for April 15 tax payments also announced Tuesday may very well fall within this window too, although that depends on how long interruptions last. Plus, in our experience, stimulus measures tend to hit gradually and not all at once. So it will be a delayed tailwind, and one that likely lingers for a while. Last time, the financial crisis-era stimulus gushed out over about two years. It is too early to say whether the tailwinds last similarly long this time, but at the moment, it looks like governments are far overshooting the likely economic consequences of containment efforts. That isn’t a judgment—just an observation—and it does hinge on how long the disruptions to business persist.

Some will inevitably worry about the associated impact on public deficits. Those concerns reigned in 2009, too. The time to crunch those numbers will come later, but for now, we would simply note: Long-term government yields are at historic lows across much of the world, and demand for government bonds with any reasonable yield is off the chart. The US, UK, Germany, France and many others could issue 30, 50, even 100-year bonds to pay for all this, locking in these astoundingly low funding costs for decades.^[i] The potential return dwarfs the marginal cost. That, not the deficit itself, is what matters most.

Lastly, as the details of all these stimulus plans emerge, pundits will likely spend oodles of time analyzing and grading them. While we think it will eventually be beneficial to explore the immediate impact on households and businesses, we think debating the efficacy of whatever projects the feds choose to invest in or who gets how big of checks is probably beside the point. Fiscal stimulus isn’t about the first spend. It is about injecting more money into the private sector, where households and businesses can spend and re-spend it—the so-called multiplier effect. Even if it takes three or four spends, the money eventually gets to its best, most productive use. The market is exceptionally good at guiding these things. It did so last time and probably does again.

So no, stimulus won’t cause a new bull market to begin. In our view, it is simply one more reason to be optimistic that a recovery, whenever it arrives, will have plenty of oomph.