Only a fiscal policy response to the coronavirus pandemic totalling $1.5trn will be enough to soothe investors, according to ClearBridge Investments' Jeff Schulze.
Schulze said equity markets were "getting closer to that inevitable bottom", noting the S&P 500 index has already slumped by 32% between 19 February and 20 March - the same number as the average peak-to-trough decline of the index during every recession since 1947.
The investment strategist admitted markets were likely to "overshoot to the downside" in the near term, but that "we could be reaching the levels where we are going to see a trough of the S&P 500".
The velocity of the market sell-off, which took a record 21 days peak to trough, had been "very ferocious", Schulze said in a webinar on Friday (20 March), due to two factors.
First, valuations had been "extremely elevated" in mid-February as market participants "fully priced in a soft landing and a reacceleration of earnings growth from 1% or 2% to 10% by the end of the year".
"As the coronavirus spread and the reality set in, a drastic change in valuations was warranted," Schulze claimed.
Second, he added, was a liquidity crisis brought about by investors suffering margin calls and becoming forced sellers. "This [means] all historical correlations move to one, which drives wider spreads, more forced selling, resulting in a negative feedback loop," Schulze explained.
The Legg Mason affiliate firm estimated systematic investors have sold a combined $400bn of global equities in the last month, sending markets into a tailspin.
While "there is probably a little bit more selling" to come, Schulze thinks "this liquidity crisis is coming to an end". Combined with the US Federal Reserve having implemented "unprecedented measures to stabilise financial markets", he said this could signal a bottom for markets.
While market direction seems to continue to be downwards, Schulze suggested it would "not be a surprise to see markets move higher in the coming days" in a "counter-trend rally", "as markets move down into pricing a recession".
The strategist noted recalled one of the biggest-ever counter-trend rallies came in Q4 2008, when markets moved up by 24% before continuing their downward trend to hit a low in March 2009.
"Markets do not move in a straight line and we would expect in the near term to see a big move to the upside, but eventually a re-testing of the lows," he said.
Fiscal response required
That low could spell a market bottom, but Schulze claimed a mammoth fiscal response from the US was needed quickly in order to assuage investors.
Visibility on the scope and timing of a fiscal policy response was needed first and foremost, Schulze said, but the figure attached to that needed to be "at least $1.5trn in order to soothe market anxieties".
"Anything less than $1.5trn and we think the markets will revolt and ultimately force Congress's hand to a number that is more agreeable with what they expect is needed to get through this soft patch."
So far, the US Federal Reserve has re-ignited its quantitative easing programme, pledging on Monday to make unlimited purchases of US Treasuries and mortgage-backed securities to help fight the pandemic.
However, the US Government has yet to outline the fiscal measures it will take to support the economy and businesses through the crisis.
Schulze said its response should come in the form of significant relief for small business owners, who will "need help very, very shortly".
"Most of your small business owners, whether that it hair salons, bars or restaurants, do not have the financial capability to last for more than a couple of weeks in a shutdown scenario."
However, Schulze admitted concerns that any relief would not reach the small business owners in time, "because there is just too many of them".
"Applications for relief take a long time to get through the red tape, but hopefully we can get relief to these individuals much quicker so you do not see mass lay-offs.
"But history does not bode well in this regard. The last couple of times we had fiscal stimulus going out to individuals, in 2001 and 2008, it took three-and-a-half months to get the first round of cheques out the door. Needless to say, neither of those stimulus packages were effective."
But this time must be different, he urged, noting the $300bn in relief for small business owners announced by the Republican Party last Thursday was "a very important component of the tax package and it is the one area I am looking at most closely to see how aggressive this recession is ultimately going to be".