(Bloomberg Opinion) -- With the announcement of sweeping monetary and fiscal emergency measures, the U.S. economy and global markets have avoided — at least for now — racing to a truly nasty place. That’s the good news. But neither is out of the woods. A very tough path lies ahead, and it will inevitably lead to more economic and financial damage and require constant policy vigilance and responsive agility.
Here are the four main things you need to know at this stage of what is a generation-defining economic and financial shock caused by the coronavirus:
- Before the Fed’s more laser-focused emergency measures on March 17 and congressional progress on the $2 trillion stimulus package this week, the economy and markets were heading rapidly into a self-feeding vicious cycle of accelerated economic and financial deleveraging. With that came the threat of a 1930s-like economic depression and 2008-like financial disruptions.
- Emergency monetary and fiscal policies have acted as circuit breakers for now. They are helping to reduce the risk of financial market dislocation and providing a bridge for many to prevent the immediate risk of liquidity pressures turning into solvency ones. Already, the higher-quality segments of the bond market are turning away from the illiquidity path that leads to market failures. Meanwhile, the emergency cash handouts and loans that the White House and Congress are set to authorize have the potential to enhance the ability for some companies to avoid immediate layoffs and complete shutdowns and for households to meet urgent needs.
- Notwithstanding all this, neither the economy nor the markets are out of the woods yet, and not just because of the inevitable hiccups that the crisis-management measures face when it comes to implementation and immediate effectiveness. For lasting stabilization, both need the health-care profession to get a much better handle on the severity and duration of the coronavirus, particularly with respect to identifying and containing the spread of the virus, treating illnesses and increasing immunity. Until then, unemployment will surge, albeit to a lesser extent that it would have otherwise, pressures will spread from missed payments and, unfortunately, far from all companies will be saved.
- For markets, the encouraging bounce in risk assets on Tuesday, which included the best day for the Dow Jones Industrial Average since 1933, may be best viewed as an up-in-quality positioning opportunity rather than an all-clear market signal. Fixed-income investors may wish to consider shadowing the Fed as it stabilizes the higher-quality markets and reducing exposures to lower-quality companies with precarious balance sheets. Stock investors may wish to consider shifts that emphasize companies with strong cash flows and no heavy debt maturities falling due over the next few quarters. And all this should be done with a mindset of mitigating risk and minimizing regret pending progress on the health-care front.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is the chief economic adviser at Allianz SE, the parent company of Pimco, where he served as CEO and co-CIO. He is president-elect of Queens' College, Cambridge, senior adviser at Gramercy and professor of practice at Wharton. His books include "The Only Game in Town" and "When Markets Collide."
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