Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

– Winston Churchill, from a speech in 1942

Markets Make an Optimistic Forecast

It is almost impossible to overstate how tumultuous 2020 has been thus far. Indeed, for those of us who study history, the news flow of the first half of 2020 has “rhymed” with historical accounts of 1918 (global coronavirus pandemic), the 1930s (deep contraction in the economy and huge spikes in unemployment), 1968 (societal unrest and distress), 1987 (stock market crash), and 2008 (credit market liquidity crunch). All of this, and more, crammed into just a few months.

The fact that the capital markets staged such a remarkable recovery in the second quarter largely reflects the awe-inspiring and unprecedented actions by policymakers to mitigate the effects of the intentional shutdown of the economy. In contrast to their relatively slow response to the 2008-2009 Great Financial Crisis, this time we have seen lawmakers, the Fed, and Treasury intervene in the economy and markets with lightning speed and on a gargantuan scale. Remember that the $700 billion Troubled Asset Relief Program (TARP) was originally conceived by Treasury Secretary Hank Paulson’s staff in early 2008 to calm the credit markets. But, it took more than six months — and the sudden failure of Lehman Brothers in September 2008 — for TARP (Troubled Asset Relief Program) to be signed into law in early October 2008.

Far from the months of dithering and debate that characterized the dark days of 2008, this time policymakers have attacked the current self-imposed recession with blazing speed and scale in support of the economy and capital markets. The Fed announced a return to Quantitative Easing (QE) and Zero Interest Rate Policy (ZIRP) on March 15, coincident with the beginning of the economic lockdown. Since then, the Fed has worked with the Treasury Department to effect purchases of a variety of securities, including both investment-grade and junk-rated bonds. Less than two weeks later, on March 27, Congress passed the CARES Act to provide almost $2 trillion in direct aid to individuals and businesses. This represents the largest stimulus package in U.S. history. These trillions of dollars of support were put in place within just the past 100 days, and it appears that much more is on the way.

The fact that COVID-19 appears to be less lethal than projected by many early epidemiological models is probably also contributing to the recovery in the markets. Lower than worst-case fatality and hospitalization rates, combined with the rising probability that a vaccine may be available by the end of 2020, are allowing the capital markets to begin to discount an economic recovery over the next six to 12 months. Indeed, the global economy is already showing signs of recovery as businesses begin to re-open in both the U.S. and the developed world.

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