Market Analysis

Patience With Punches

We're too eager to give up on monetary and fiscal stimulus before it's had a chance to work.

Story Highlights:

  • Many worry monetary and fiscal stimulus has failed.
  • But historically, there's a lag between monetary stimulus and its full economic effect—anywhere from six months to a couple years.


Anyone who's seen the movie Rocky knows it's never over ‘til it's over—no matter how severe the beating. Sadly, such cinematic sagacity escapes economic spectators these days. We seem ready to throw in the towel on monetary and fiscal stimulus.

Today's investing zeitgeist goes: Monetary and fiscal stimulus has failed. We've nearly doubled the money supply in four months and TARP was implemented way back in November, yet here we are in January—and the economy continues deteriorating. Even worse, the Fed is out of tools, the target rate is just about zero, and the government is up to its ears in debt. The US today is commonly described as either Japan in the 1990s or the US in the 1930s—or some combination of the worst of the two.

We elaborated before on the Fed's still-loaded arsenal and commented on the mostly faulty Japan in the 1980s and US in the 1930s comparisons as well. However, there's an important feature of such claims going largely ignored: It's far too early to draw any such conclusions in the first place.

Historically, there's a lag between implementation of stimulus and its full economic effect—anywhere from six months to a couple years. And although the Fed's been cutting rates for a good long while, they didn't aggressively start growing the money supply until a few months ago. It's wrong to proclaim monetary policy dead on arrival. Instead, expect the full effects of a fast-growing money supply and fiscal stimulus to be evident a couple quarters from now, or perhaps longer. We haven't even yet seen all there will be. More measures are in the offing—the second half of TARP, new fiscal stimulus packages possibly including tax cuts, and likely more Fed-initiated help for banks. Said differently, the proverbial "wall" of stimulus set to hit the economy might yet grow higher before it even has a tangible impact.

Take, the Obama-promised infrastructure projects. Opinion pages and pundits are abuzz with the possibilities: Will we build roads, bridges, a new energy infrastructure, digitize health care records? Anyone who's ever run a business knows those things don't happen quickly. There's procurement, hiring vendors, getting permits, and a bevy of other considerations before ground is even broken. None of that will show up in GDP or similar economic "indicators" for a long time.

The same holds true for monetary stimulus. So far, liquidity and stability provided by the Fed has begun to thaw credit markets, albeit slowly and quietly. Many borrowing rates and spreads are now at or below their September 2008 levels. Eventually, interbank lending will return to normal levels, and the tidal wave of new money will begin circulating more broadly to businesses and individuals. This won't happen overnight. In fact, it will likely be so gradual that there won't come a day where the end of the credit crisis is announced. More likely, we will simply wake one morning to find things are running smoothly in credit and capital markets generally, and the press will have already moved on to the next big worry.

Does all this mean investors should wait until monetary stimulus kicks in fully to get back into stocks? Absolutely not. The market will begin pricing the stimulus' effects long before they show up in economic statistics. Expect the news to stay bad for a long time to come, but for stocks to rise in the face of it. Don't give up on the underdog economy just yet—only when all seems lost does the hero stage a comeback.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.