Initial fiscal response not enough to weather the storm

by: , Managing Director, Economist, and Portfolio Manager, New York Life Investment Management; Multi-Asset Solutions team, Multi-Asset Solutions team, New York Life Investments

In response to the negative economic impact of the precautionary measures recently enacted to combat the COVID-19 crisis, fiscal plans have been announced in several countries. In most cases, they are a good start, but we believe more action will be necessary.

As shown in the chart below, some of the most sizable fiscal steps have been taken in countries that have already seen the number of COVID-19 cases stabilize (China and Korea). Other governments will have to use more targeted approaches to reduce market fear and stabilize the economy.

The international playbook: Global fiscal responses to COVID-19

Outside of the U.S., governments have stepped in, as depicted in the chart below. For example, Germany announced a potentially large fiscal support package to help mitigate the impacts of the virus by providing credit for businesses in need. Several other European Union countries have announced deals (or intentions for deals) currently in the works, most recently the United Kingdom. We will be closely monitoring the fiscal responses across the most important economics in weeks ahead.

Sources: Multi-Asset Solution team, Bloomberg, JP Morgan, 3/16/20. The analysis includes the 20 biggest countries by GDP, for which data is available. Bubble size depicts GDP.

Notably, countries like China and Korea have put in place significant fiscal stimulus, while also slowing the rate of infection. These examples offer important roadmaps for governments.

For investors, the combination of fiscal stimulus with signs of slowing in the number of confirmed COVID-19 cases also optimistically suggest that there may be a light at end of the tunnel – even if distant. We are monitoring both indicators to identify a turnaround in market volatility.

U.S. stimulus in the works

In the U.S., initial steps towards government support of the economy have been taken, but we believe that more stimulus will be needed to help impacted businesses and individuals to weather the storm.

Indeed, fiscal package size and breadth has been increasing as the government’s understanding of the crisis has developed. Washington agreed to $50 billion in funding to support the economy from the most immediate impacts of the COVID-19 pandemic. The package comes after an earlier $8 billion policy tailored to fight the virus. The new package takes first steps to support the health of the economy and those hurt by the setback in activity. It includes:

  • two weeks of paid sick leave and up to three months of paid family and medical leave,
  • enhanced unemployment benefits,
  • free virus testing including for those who lack insurance,
  • additional food aid and federal funds for Medicaid.

These are important steps. However, more is needed.

What does a comprehensive policy response look like?

Based on current conditions, our view is that the fiscal response will be even more important at this juncture than during recessions and crises of the past. Monetary stimulus plays an important role in ensuring liquidity is available, but given the acute decline in cash flows, central banks alone will not be able to stabilize the economy. Comprehensive policy will need to be big, bold, targeted, and efficient.

Big and Bold: We believe Washington would be most effective targeting a “go big or go home” approach like that introduced during the global financial crisis. If the U.S. government acts quickly and efficiently, a response of smaller magnitude could accomplish a lot in the current situation.

Targeted: Another important aspect will be that fiscal stimulus is aimed at getting cash in the hands of households hit by the crisis via layoffs or cutbacks in hours. The virus and the policies implemented to limit its spread will have a direct impact on those most vulnerable: hourly workers in retail, hospitality, travel, entertainment, fitness, and restaurants. The gig economy adds an additional layer of uncertainty, since we no longer operate in a world where everybody works 9-5 for an employer in a well-defined industry. A targeted approach to support workers, and not just tax cuts, will be necessary.

Efficient: Finally, liquidity backstops are necessary for hard hit industries, including small businesses. The precautionary measures taken to combat the virus have created an acute liquidity crisis for many companies. The halt in economic activity will erode necessary corporate revenues used to pay down debt and keep doors open. There are many different approaches. The Federal Reserve has officially re-launched its lending facility to support short-term commercial paper markets. More may be necessary, especially for small businesses who cannot issue commercial paper.

Washington on the move

Rumors of stimulus proposals in excess of $1 trillion, including direct cash payouts to impacted workers are beginning to circulate. Sending a $1,000 check for households below median income, could be an efficient way to support the most vulnerable consumers. This policy alone would create roughly $65 billion per month in stimulus. If applied to all households, it would total around $130 billion per month. This could be enacted on a transitory basis, to support hard hit households through the crisis until the virus is under control. It could be affordably funded at a time when U.S. government debt is in high demand, potentially by issuing short-term Treasury bills, which reduces the interest cost to near zero.

We see a high chance of bipartisan cooperation on further fiscal support. In an election year, neither Republicans nor Democrats will want to be blamed for failing to support the economy in this critical situation. And if not addressed, the liquidity crisis now facing many businesses and households risks causing a wave of layoffs and bankruptcies – not a scenario anyone will like to see.

In short

We expect more steps towards fiscal stimulus to be enacted in the weeks ahead, and this will help mitigate the direct hit to the economy from the severe measures taken to combat the virus. While fiscal support steps are good news, it may still take some time before we see markets stabilize. Until we see the number of confirmed new cases stabilize or decline, or a treatment or vaccine is successfully developed, markets are likely to remain volatile.

In the meantime, we are active in our portfolios to ensure that large daily market moves do not drastically change our desired exposure to risk assets. For now, we remain underweight risk assets. Downside risks outweigh upside potential in an economy that has only just begun to adjust to increasingly extreme social distancing measures. The fiscal response is a good first step, but we will need to see more to help weather this storm.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should
not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company.


Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist, and Portfolio Manager with New York Life Investment Management’s Multi Asset Solutions (MAS) team

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Multi-Asset Solutions team

Multi-Asset Solutions team, New York Life Investments

Multi-Asset Solution’s (MAS) is New York Life investments’ specialist in multi-asset investing.The team offers multi asset strategies, market intelligence, and customized solutions to its strategic partners. Managed assets include MainStay funds, strategic partnerships and customized solutions with third parties. Investment services include market insights, risk analysis, and financial education. Strategic partnerships are designed to meet bespoke investment objectives, such as income generation or inflation protection, through holistic solutions.

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