Executive Summary
COVID-19 has the potential to have long-lasting impacts on our society that outlive the current crisis. In this piece Jonathan Lewis, US Chief Investment Officer, views COVID-19 through a historical lens and applies the lessons learned to what we can expect.
Did you know?
- One of the lasting impacts of the Spanish Flu of 1918, was the ratification of the 19th Amendment giving women the right to vote.
- The Federal Reserve Bank was created as part of the recovery effort following the San Francisco Earthquake and Fire of 1906.
- The launch of Sputnik, the Russian satellite, led to the passage of the National Defense Education Act.
These are a few examples of historically significant outcomes born of the federal government’s response to past national crises – prompting us to analyze the potential impacts to come from official responses to the COVID-19 crisis. There is still much uncertainty regarding what America will look like in the next eighteen months. If history is a guide, the only thing that is certain is there will be changes in the American way of life driven largely by the federal response. This has the potential to significantly impact markets and the future of asset allocation.
What does this mean for a post COVID-19 America and markets?
- Stocks may rally, depending on whether we see more success in fighting the virus and markets respond favorably. After the surprise attack on Pearl Harbor in December 1941, stocks fell sharply. The turning point for markets coincided once a series of battles were won between April and May of 1942, which demonstrated the US’s ability to win and sparked hope that the US would lead its allies to victory. Currently risk markets appear to have succeeded in making a bottom for the time being. Given all the uncertainties about the future, it is unclear that it will be sustained. Market bottoms are often retested after a major sell-off; this has yet to occur.
- We should expect the Fed’s intervention in bond markets to remain at elevated levels and to even expand.The Fed’s intervention in the bond market during World War II established an interest rate ceiling that stayed in place until 1952 to make it more affordable for the government to borrow money in order to provide funding for the war effort. If this historical example proves informative, the Fed could react in the same way and keep interest rates low and fund the government’s reaction to COVID-19.
- We believe Investors will likely need to focus on fixed income proxies in the alternative private markets as well as traditional fixed income substitutes. In the scenario where interest rates remain low, fixed income markets are not likely to generate the income needed by savers and retirees to sustain their lifestyles or meet their financial objectives. The role of fixed income in an asset allocation framework and as a diversifier will likely become more limited and investors will need to consider new defensive and income-producing asset classes.
