Loomis Sayles’ Full Discretion Team Talks COVID-19, Policy, Credit and New Territory

On Thursday, March 12, Loomis Sayles’ Full Discretion team held a conference call to discuss current conditions, upcoming challenges and potential portfolio positioning and solutions. Here, portfolio managers Matt Eagan and Elaine Stokes summarized a few key points.

The Five Stages of COVID-19

There seems to be a pattern to how countries and populations are reacting to COVID-19. We’ve identified five phases:

  1. As cases start getting confirmed, denial kicks. Governments take limited steps, hoping for a limited outbreak.
  2. Escalation of illnesses can lead to panic across communities and financial markets.
  3. Governments finally implement containment and mitigation measures.
  4. As containment measures control the contagion, economic pain sets in.
  5. Governments rush to consider stimulus options to ease the economic impact.

Policy response

Different than previous market shocks, the effects of COVID-19 will be rolling forward over a period of time. It is unclear how long this will last; it will depend largely on the policy response.

  • First and foremost, global pandemic policy needs to be swift and coordinated. The longer it takes to implement mitigation and containment measures, the longer the outbreak will wreak havoc through communities and financial markets. Right now, much of the globe is playing catch up—we believe the US is playing catch up.
  • Monetary policy is something we’ve all gotten used to over the past 10 years. We know it can be done swiftly and we’re seeing it at work now with cuts from the Fed and added liquidity pumped into the system. Central banks are pulling their levers. We’re seeing coordinated global monetary policy now. That should keep this from becoming a financial crisis.
  • Fiscal policy is another story and it’s been woefully underused in this cycle. Fiscal policy is going to have to be targeted and sweeping. We know that there are going to be businesses and sectors where policy will not reach, and we expect to see losses in the credit markets. In our view, the sooner governments act, the better.

What we can say is that we feel a lot better today about policy response in the US than we did last week. It seems like we’re now moving in the right direction as the US government has shifted from denial to containment. Policy response is on its way.

(Post-call update: on Friday, March 13, President Trump announced $50 billion in federal aid related to COVID-19. This is a good step as the US government shifts its focus to containment.)