Hope from China, truth about stimulus, and why cash is the ultimate hedge

By David B. Armstrong, CFA | Mar 23, 2020 | Weekly Market Commentary

In the irony of all ironies, the economies of China and South Korea are recovering. Now. While the global economy has come to a virtual halt. It’s either more evidence that we’re in the upside down—or, it can provide us with some hope.

It seems the government is working to introduce several different programs that will amount to several trillion dollars for immediate relief, but this will only serve to stabilize the economy, not create demand.  That will only happen once we can all return to our daily lives without fear of catching or spreading the virus to others.

That is going to happen – it only makes sense.  It’s a matter of what comes first: the “all clear” is sounded and we return to normal, or the wind that a stimulus package creates in our sails dies out.

What’s going on with the stimulus package?

It’s a moving target. There is some bickering over a few issues, but here’s what seems to be the meat of the deal they are discussing. The relief package will initially total around $2 trillion and will include:

• Two $1,200 direct payments to individuals totaling over $600 billion;
• An extension of tax payments totaling over $300 billion;
• Small business loans and grants totaling over $350 billion;
• Targeted industry/company loans and grants totaling over $450 billion;
• Unemployment insurance and healthcare grants over $250 billion;
• State assistance and many other additional loans and grants totaling over $200 billion.

None of this is set in stone – they obviously may change this as negotiations continue. I’m reading that the remaining issues are things like terms of loans, executive compensation, dividend policy, stock buybacks and equity participation.

While it doesn’t help demand, it provides needed liquidity to avoid further potential risks to the financial system and the overall economy.

Things will likely get a little darker before it gets lighter again.  We will be pummeled daily with infection stats and mortality reports but looking at how this has been playing out, the virus will crest, flatten out, then finally decline.

The end of the world is not upon us, no matter how much your survival instinct is kicking in.  (I’m working on a second blog that goes into the reason your survival instincts have to be ignored in situations like this.)

Cash is king—and the ultimate hedge

Most Monument clients have seen their cash balances increase in managed accounts over the past few weeks, AND THIS IS BY DESIGN.  Stocks that screen for sales in the normal course of our running our portfolio strategy are usually replaced with new stocks.  During times of volatility, we simply hold the cash for redeployment once we get a better sense that the crisis is peaking.

Remember, cash is the best and cheapest hedge that exists.

History tells us that events like this are rare but have always been great opportunities to profitably invest for those who maintain a long-term perspective. Look across the valley and towards the next peak – there may not be much visibility, and it’s hard to be sure it’s there, but it is.

Keep looking forward,

Dave

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