Market Reaction should be tempered as U.S. Government bailout package is not dead!

red line chart on blue background showing investment market reaction to policy inadequacyInvestment market reaction to the policy inadequacy of the US Houses of Congress overnight shows a high level of dissatisfaction – and frustration – on the part of investors. This article argues that more will be done and that investors may need to be patient.
 
The announcement this morning that the US Government’s financial rescue package “Troubled Assets Relief Program” (TARP) was not approved by the US House of representatives (with a vote of 228 against and 205 for), has had a significant impact on global financial markets overnight. Equity markets have had sharp declines while bond markets (Sovereign Government Bonds) moved sharply higher in price, benefiting from a flight to safety.
 
However, it is important to note that the TARP Bill is not dead. Both Houses (House of Representatives and the Senate) are likely to meet again this week to consider a revised package. The US House of Representatives only needs an extra 12 votes to secure the Bill, so this means there is still scope for it to go through, with some modifications, later this week. (The Vote eventually passed and was signed into law by President Bush.)
 
Whilst the US works on the necessary revisions to the Bill, world markets are likely to go through a turbulent few days. What we are currently experiencing is a period of extreme market volatility and, whilst uncertainty remains in the US, the impact will be felt globally, further reinforcing the frustrated investment market reaction to the policy inadequacy of governments.
 
The priority for the authorities is to minimise and manage the systemic risk to the global financial system. Stabilising financial asset markets will generate greater investor confidence and allow the global economy to regain much needed traction. Given the magnitude of market dislocation, global authorities are in the process of using all avenues such as easing fiscal policy, easing monetary policy, massive injections of liquidity to the financial markets, bailouts and direct market intervention to absorb troubled assets as part of their coordinated initiatives to alleviate the pressures that have been building in the global financial system over the past few months.
 
The successful use of fiscal policy in the past, naturally gives Policy makers the confidence to introduce significant fiscal policy initiatives this time around, given the magnitude and depth of the prevailing crisis. The most recent use of Fiscal policy in a significant scale was in Japan, after the property market collapse and the stock market meltdown in the early 90’s prompted fiscal policy initiatives of an unprecedented scale. These types of policy initiatives help first to stabilise financial asset markets by creating domestic demand and reducing investor risk concerns. Such policy initiatives are good for growth assets such as equities, in the medium to long-term.
 
It is important to emphasise that at times such as this, investors should avoid making irrational investment decisions based on heightened market volatility, fear or uncertainty in their reaction to the policy inadequacy of governments (whether those inadequacies are real or perceived). History proves that market conditions such as these give long-term rational investors an excellent opportunity to accumulate assets that provide them with superior medium to long-term returns.
 
Disclaimer
This publication has been compiled by St.George Investment Solutions, a division of St.George Bank Ltd ABN 92 055 513 070 Australian Financial Services Licence Number 240977 (St.George). Past performance is not a reliable indicator of future performance. Whilst every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based are reasonable, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to date or fit for any purpose; and (b) St.George is not in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Current as at 30 September 2008.

As part of our concentrated service to clients during the GFC we brought articles of direct relevance to them to keep them informed as to progress with various initiatives employed to minimise the effects of the GFC: they were posted and notified to clients promptly so that we stayed engaged with our clients throughout that rather traumatic period. This particular article was originally posted in September 2008: it has occasionally been refreshed, most recently in January 2020 (for SEO purposes).