COVID-19: What is the impact of dramatic monetary and fiscal policy measures on investors?

“Whatever it takes” has not only been touted by Chancellor Sunak and the Bank of England but by central banks and governments across Europe and North America too. We consider the possible implications of the loosening of both monetary and fiscal policy for investors.

Following the economic events of the past two decades, it has now almost become the norm to assume that globally, central banks and governments will quickly step in to attempt to stem losses and provide reassurance to financial markets. The outbreak of the coronavirus has demonstrated this willingness once again as governments and central banks across the world have been quick to react to the immediate and predicted impact of this virus.

The Bank of England has slashed the base rate twice in quick succession, with it now at its 325-year low of 0.10%. It has announced a Quantitative Easing (QE) round of £210 billion. The US Federal Reserve has also dramatically cut its target rate to 0.00-0.25% and announced unlimited amounts of QE. On Friday 27 March, Congress approved a stimulus package of over $2.2 trillion. The European Central bank was initially slower than others to react but has announced €750 billion of QE, and similar monetary policy has been adopted across many Asian economies. 

Loosening of monetary and fiscal policy: the impact on asset prices

These measures have been seen before. The main difference from 2008 however, is that this time, the rhetoric from politicians would suggest they are targeting more of a consumer-led recovery than a corporate-led one. A reluctance to immediately bail out airlines and other big corporates, cash handouts for most American taxpayers, and wage subsidy packages in the UK provide some evidence of these intentions in terms of fiscal policy. However, the equally important monetary policy is similar to post-2008 and is likely to prolong the same low interest rate and easy money environment we have seen over the past decade.

This environment has proven to suit asset owners particularly well. The following chart looks at the return on $10,000 invested in the S&P 500 index over the QE rounds carried out by the Federal Reserve in the aftermath of 2008.


As can be seen in this case, although not the only contributory factor, a loosening of monetary policy is often accompanied by a strong period of growth in asset prices. This is a story that can be seen across many markets since the global financial crisis, not just the US.

Uncertainty prevails

In the current climate, asset prices are particularly volatile as uncertainty in financial markets is rampant. Newspaper headlines would have you believe that global markets have reacted positively to targeted fiscal and monetary interventions so far with the FTSE 100 and S&P 500 both rising by more than 9% on the day it became clear that the US stimulus package would be passed. This was one of the best days for both indices in their histories and was followed by another day of strong performance. However, markets subsequently fell back soon after and remain volatile, demonstrating that there is no easy fix and this will not be a straightforward recovery; particularly until a greater understanding of the spread of the virus can bring more certainty.

While there is a long way to go for markets to recover to where they were at the start of the year and economies will undoubtedly continue to struggle for some time; it is clear that central banks and governments are willing to act to take even greater measures, where necessary. In doing so, investors could find themselves with a familiar economic backdrop over the coming years.

A long-term disciplined investment approach

One could get bogged down in the questions of whether the lessons have been learnt from 2008, whether another decade of cheap money at the heart of the global economy is sustainable and what the consequences may be once monetary policy is reversed. However, as we addressed in our last Insight; for investors, trying to predict or time any market changes rarely adds any value in the long term. Knee-jerk reactions can have detrimental consequences and one would do well not to get caught up in the short-term noise. As always, a structured, disciplined and well-diversified approach to investment can produce favourable long-term results, whatever market conditions are experienced along the way.

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