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What does it cost to support markets? $2 trillion
1st April, 2020

After interest rate cuts and quantitative easing, we now know what it takes to revive sliding markets: a ‘mere’ $2 trillion stimulus package from US policymakers. While details of the package are limited, it appears to provide a lifeline for hard-hit sectors such as airlines along with some job security measures.

The S&P 500 rose around 10% in response to the news and has sustained that level into a second day. No-one would be calling the bottom of the market – the market will need to digest a lot of bad news over the coming months. But at least it has had some impact. Investors have been reassured that policymakers are willing to take strong measures to shore up the global economy.

It also raises the question of what happens if the impact turns out to be less than expected. It has become very fashionable only to talk about worst-case scenarios. That is perhaps understandable when people are facing the death of loved ones. However, it is the job of any investor to look at all scenarios, which means also considering what happens if the outcome is better than we think. This has been notably absent from current thinking.

There are alternative scenarios: the virus may lose potency as the weather gets warmer; there may be more ‘herd immunity’ than the current models suggest, world-wide efforts for a treatment may finally bear fruit. Should people be released from confinement sooner than expected with their jobs intact, it could trigger a spending bonanza.

Inflation remains a big risk. It is interesting to note that a lot of the proposed fiscal stimulus in the UK only kicks in if the climate for business gets really bad. Businesses have to prove hardship, or that staff would have been made redundant. Many measures take the form of loans rather than hand-outs. This is not helicopter money, but business support. It will be hoped that the US stimulus has similar checks and balances in place. Otherwise, if the virus doesn’t turn out to have its expected impact, inflation could rear its head.

This is a long-term problem rather than a short-term problem, but it is a potent argument against playing it safe in bonds today. The coronavirus has made bonds look even riskier.

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