In response to the COVID-19 crisis, an unprecedented amount of leverage has entered the global economy, particularly as a percentage of GDP. While financial companies are typically leveraged, the amount of debt being held by non-financial companies and individuals has ballooned just as incomes have declined. This combination of rising debt and falling income may be setting the stage for another financial crisis.
The global pandemic has produced a large question mark about the future. But the unprecedented amount of fiscal and monetary stimulus by central banks and governments has added an additional layer of uncertainty to the mix. While it is clear that significant stimulus was needed to avert a catastrophe, it is not clear what the long-term cost will be for such a massive response. Looking through the Keynesian lens of growth and inflation, we examine four scenarios: Recession, “Goldilocks” expansion, Bubble expansion and Stagflation. This article describes the market environment under each scenario and its investment implications.
It felt as though a full year of market events happened in March 2020. A pandemic, a massive spike in spot volatility, an oil price war, a broad lockdown, and an end to the unprecedented bull market. Though most of these issues are persisting into April, it was a small relief just to turn the calendar and begin a new month. For us at First Quadrant, April 1st, 2020, was a day we have long had circled in our calendars, as it marked the three-year anniversary of our Global Diversified Macro strategy.