Wall Street Journal 08_04_2020

THE WALL STREET JOURNAL. Wednesday, April 8, 2020 |A19

It’s a Good Time to ‘Stock’ Up

low future returns. Today they

have fallen more than 20%, sug-

gesting that equity purchases at to-

day’s levels should earn decent fu-

ture returns.

A second reason investors may

want to begin taking a more con-

structive view of the stock market is

that alternative investments aren’t

offering attractive returns at the

moment. Yield on the safest bonds

in the U.S. are near zero and are ac-

tually negative in Europe and Japan.

Thus, the gap between probable eq-

uity returns and bond yields has

risen significantly.

Finally, common stocks—repre-

senting ownership of real assets

(factories, commodities, real estate,

etc.)—have been a reliable long-run

inflation hedge. It is true that in re-

cent years inflation has been tame,

and many analysts believe that it

will remain inconsequential for a

while. But central banks across the

globe have been pouring unprece-

dented amounts of money into their

economies. The Federal Reserve has

signaled an almost unlimited will-

ingness to buy financial instru-

ments and expand the money sup-

ply. The recent $2 trillion fiscal

stimulus package may be only the

beginning, and a similar-sized infra-

structure package may follow. When

the pandemic has passed, there is

certainly a possibility that our re-

cent experience of stable prices

won’t be permanent.

Rebalancing is an investment

technique that has proved effective

when relative valuations of differ-

ent asset classes are in flux. All in-

vestment portfolios need to be di-

versified, with the exact mix of

holdings reflecting the investor’s

capacity and tolerance for risk. Re-

balancing simply involves a periodic

review to ensure that the combina-

tion of investments in a portfolio

comports with the investor’s atti-

tude toward risk.

In December, Atanu Saha and I

pointed out on these pages that

stock prices had soared over the

past year and that investors should

consider whether their overall port-

folios were riskier than their target

allocations. If so, rebalancing the

portfolio by selling some stocks and

investing the proceeds in safer as-

sets would be warranted. Rebalanc-

ing always tends to bring portfolio

allocations back to target ranges to

constrain risk. In very volatile mar-

kets, it can also enhance returns.

Today I recommend that investors

consider moving in the opposite di-

rection and begin a program of liqui-

dating a portion of their bond and

short-term securities funds and buy-

ing equities instead. There is no need

to complete any reallocation all at

once. By moving money into equities

slowly over time, you will “dollar-

cost average” your reallocations and

avoid the feeling of regret you could

experience by reallocating equities at

prices that could be well above the

ultimate market bottom.

Whenever you do rebalance, be

aware of the tax implications. By

selling an asset class that has risen

in value, you may have realized a

capital gain. If so, try to sell a secu-

rity or fund carried at a loss, and re-

place it with an equivalent but not

identical investment. And favor low-

cost index funds and exchange-

traded funds, as well as discount

brokers. The one thing you can con-

trol is the investment expenses you

incur.

One final piece of advice. The un-

precedented disruptions caused by

the coronavirus underscore the ab-

solute necessity of having a precau-

tionary cash reserve of at least three

months’ living expenses to help pay

for unexpected medical bills and

provide a cushion during a period of

unemployment. If you are not ade-

quately covered by medical or dis-

ability insurance, or if you work in

the gig economy where employment

opportunities can disappear over-

night, the reserve needs to be larger.

A “cash reserve” invested in short-

term securities is over and above

any reserves you may carry in your

investment portfolio. Replenishing

(or funding) a precautionary cash

reserve fund should come before any

decisions on your investment portfo-

lio. And any known large expendi-

tures (such as a college tuition pay-

ment) need to be funded with safe

short-term investments (such as

bank certificates of deposit) whose

maturity matches the date at which

the funds will be needed.

Mr. Malkiel is author of “A Ran-

dom Walk Down Wall Street.”

By Burton G. Malkiel

CHAD CROWE

T

he NCAA college basket-
ball tournament was can-
celed, but for those fol-
lowing the financial
markets and the real econ-
omy, there was more than enough
March madness to satisfy the most
rabid thrill-seeker. We have wit-
nessed unprecedented volatility, a
sudden bear market in stocks, and a
collapse in the labor market unri-
valed in its speed and intensity.
These are the times that can produce
life-changing investment blunders as
well as unique opportunities.
No one knows how many people
the global Covid-19 pandemic will
kill or how long it will last. Nor does
anyone know the extent of the
global downturn and how much fur-
ther stock prices will fall. But there
is one thing that everyone knows:
Equity valuations are far more at-
tractive today than they were at the
start of 2020.

The so-called CAPE ratio—the
price-earnings multiple for the mar-
ket based on cyclically adjusted
earnings averaged over the past 10
years—is the most effective tool for
predicting the likely long-run payoff
from holding a diversified portfolio
of common stocks. Initial CAPE ra-
tios predict about 40% of the varia-
tion in next-decade stock returns.
When CAPEs were very high (as they
were in early 2000), stock returns
were extremely low for the next de-
cade. The best decades for stock re-
turns occurred when initial CAPEs
were low.
At the market peak in February,
CAPE ratios were at elevated lev-
els—not as high as at the peak of
the dot-com bubble, but among the
highest in history, suggesting very

Amid market volatility,

one thing is clear: Equities

have become a good deal.

OPINION

Congress Can

Still Save

The Recovery

By Casey B. Mulligan

And Brian Blase

T

he coronavirus has crushed the

U.S. economy, and the legisla-

tive remedies Congress re-

cently passed will make the recovery

slower once it’s safe to return to

work.

No doubt lawmakers needed to act.

Relief was likely most important for

small businesses and working parents

who face tremendous hardship with

the closing of schools and day-care

centers. In response to the wide-

spread job and revenue losses, Con-

gress provided a massive infusion of

payments to families and businesses.

But legislators appear to have paid

little attention to what their hastily

assembled laws would do for incen-

tives to work and succeed, which

form the very essence of an economic

recovery.

One measure that will soon be fa-

mous: the $1,000 weekly payments to

the average person receiving unem-

ployment insurance benefits. Congress

provided a $600 increase for a four-

month period to the nearly $400 aver-

age weekly amount that the unem-

ployed receive.

A thousand dollars a week is more

than what the majority of full-time

workers were getting paid before the

virus arrived. The $600 bonus is 24

times the $25 bonus Congress paid

during the last recession, when gov-

ernment policies that discouraged

work severely harmed the economic

recovery.

Any legislative reaction to relieve

the pain would have eroded some of

the rewards to work by making it

more tolerable to be unemployed. But

never before in American history

could a majority of the workforce get

a raise merely by receiving a pink

slip. The aid is also available to peo-

ple who self-attest they can’t work as

a result of coronavirus. Several Sen-

ate Republicans objected to the un-

employment-benefit boost but ulti-

mately voted for the bill.

When it’s safe for businesses like

restaurants and hotels to reopen, em-

ployers will be competing with the

government for a potential employee’s

time. Because many unemployed work-

ers will earn more from remaining idle,

they won’t rush to come back. This will

make it difficult for many businesses,

particularly smaller ones, to produce

at the previrus level of output.

We also bet many of the legislators

who voted for the Cares Act didn’t re-

alize that it also effectively gutted

state drug tests for unemployment in-

surance. Section 2102 of the legislation

would simply put people who failed a

drug test, and anyone else who en-

countered an obstacle qualifying for

their state program, on an equivalent

federal program.

The legislation also seems to subsi-

dize layoffs by big companies. The

problem is one major provision that

was intended to help small businesses

maintain payroll by giving companies

with 500 or fewer employees up to

$10 million in forgivable loans. The

legislation was drafted in a way that

may allow businesses with more than

500 workers to get hold of this money

by firing people. Congress or regula-

tors should make it clear immediately

whether this is permitted.

In another provision Washington

assumes responsibility for the unem-

ployment-insurance contributions

made by government and nonprofit

employers through 2020—eliminat-

ing what is in effect a tax on layoffs.

That will mean more payroll slashing

by local governments and nonprofits.

To make matters worse, many of

these policies extend to midsummer

or longer, when concerns about con-

tagion—especially among the

nonelderly, who do more than 90% of

work—will hopefully have given way

to the desire to get back to normal.

There will be pressure to extend

this relief even further, particularly

since the unemployment rate, in part

because of the Congress’s recent ef-

forts, will remain higher than de-

sired. While it’s too late for legisla-

tors to approach the first round of

relief with appropriate care, they can

still avoid making the same mistakes

twice.

Mr. Mulligan, a professor of eco-

nomics at the University of Chicago,

served as chief economist of the

White House Council of Economic Ad-

visers, 2018-19, and is author of

“You’re Hired! Untold Successes and

Failures of a Populist President,”

forthcoming in July. Mr. Blase was a

special assistant to President Trump

at the National Economic Council,

2017-19. He is president of Blase Pol-

icy Strategies.

Lawmakers should correct

incentives not to work, lest

they slow the recovery

after the economy reopens.

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The World Is Watching How America Handles Covid-19

S

eismic events reorder interna-
tional relations. After Covid-19,
look for three factors to deter-
mine the relative standing of the U.S.,
China and others in the world.
First, as a friend from Singapore
observed, strong societies and sys-
tems will emerge stronger; weak
ones will falter. Sturdy nations will
rely on economic resources and
power, but also on their social and
governmental cohesion and ability to
learn from crises. Second, a coun-
try’s performance will depend on a
healthy private sector. Private com-
panies, foundations, civil society
groups and scientific communities
will drive innovation and adjust-
ment. Third, national reputations
will depend on the face that coun-
tries show the world. Natural leaders
reveal empathy for others. Countries
that demonstrate a willingness to co-
operate with and assist partners will
rank well. Good records of perfor-
mance will matter, too.
China has decided to combine re-
covery at home with advocating for
a world “community of shared inter-
ests.” With the underlying aim of
promoting “globalization with Chi-
nese characteristics,” Beijing’s de-
sign has two tracks. One track
nudges existing international insti-
tutions—for health, trade and fi-
nance, development, information
and security—toward Chinese inter-
ests and norms. The second draws
upon the Chinese tradition of tribu-
tary ties: China offers countries help
and economic benefits, often linked
to Beijing’s model of infrastructure
for development, if the partners sig-
nal respect—and certainly do not
criticize the ruling Communist
Party.
The Trump administration, which
has conducted narrow transactional
diplomacy, has not conveyed an im-
pression of international leadership.
For example, White House controls

over foreign production by U.S.

companies—harming Canada, Ger-

many and Latin America—will en-

courage others to restrict exports of

inputs, seize supplies and even na-

tionalize U.S. plants abroad. U.S.

squabbles and indifference sound

dissonant notes. The world had

come to expect that America will

confront problems and propose ac-

tions, even if others have different

ends and means.

The White House’s diffidence is

not characteristic of the nation.

Other American institutions are

stepping up. The Federal Reserve

promptly activated dollar swap lines

with foreign central banks and re-

cently improvised creative repur-

chase-borrowing terms to assist for-

eign holders of U.S. Treasury

securities, thereby making Treasurys

even more valuable. The U.S. military

watches over ramparts, sea lanes

and airspace world-wide. American

intelligence agencies doubtless con-

tinue to alert partners about risks

and threats.

U.S. private actors are rising to

many challenges. On a small group

call in which I participated, a senior

European Commissioner privately

praised the adaptability and support

of much-maligned U.S. technology

companies in meeting network, in-

formation and safety needs. The

Gates Foundation moved with dis-

patch to help research and test treat-

ments and to support public-health

systems in poor countries. American

health-care companies are at the

forefront of finding medicines and

vaccines. MIT recently announced

that it will post free plans online for

an emergency ventilator that can be

built for about $100.

Over months, the Trump adminis-

tration adapted its domestic pan-

demic messages and approaches; it

now needs a complementary interna-

tional strategy. Congress can help.

The first step is simple: Show sym-

pathy to others, as American human-

itarians have always done. Chinese

citizens, many of whom still admire

America, perceived the U.S. as dis-

paraging China’s plight. The Chinese

might not have expected help, but

insults surprised them.

Past presidents showed America’s

heart—as well as its brains and

brawn—by looking out for the most

vulnerable during times of crisis.

President George W. Bush’s cam-

paigns to counter HIV/AIDS and ma-

laria left a lasting legacy in sub-Sa-

haran Africa. President Obama

helped contain a raging Ebola epi-

demic in West Africa. American aid

depends on experience, organization,

technological adaptations and coop-

eration with partners, not just on

money.

The Institute of International Fi-

nance estimates that investors have

pulled $100 billion from emerging

markets since Jan. 21. These coun-

tries cannot cut interest rates, as the

U.S. has done, or unleash exceptional

spending for health care or fiscal

support. The International Monetary

Fund and World Bank have warned

that all creditors to developing

countries, and especially China, need

to reveal loans and terms transpar-

ently. Government lenders should of-

fer payment moratoria and perhaps

debt relief. The U.S. should organize

a coalition in the Group of 20 to

champion the cause of debt trans-

parency and relief.

Just as the U.S. moved quickly to

ensure that markets operated effec-

tively at home, Washington should

lead in overcoming frictions and bar-

riers abroad. Trade requires trust;

the U.S. is uniquely positioned to

promote transparency and rebuild

confidence. Export bans of medicines

and equipment will cost lives and

delay economic revival. Food sup-

plies must move quickly and safely.

The large U.S. stimulus package, with

more likely to come, can build mo-

mentum toward a global recovery if

economies break down barriers to

trade, keep supply chains working,

and sustain trade finance.

At the appropriate time, the U.S.

and others must study the origins

and lessons of this pandemic. Amer-

ica should emphasize the importance

of sharing medical data promptly. In

turn, it can then learn lessons about

prevention, warning systems, readi-

ness and testing, diverse sourcing

and stockpiles of critical goods, con-

tainment and mitigation methods,

and transitions to recovery.

U.S. international leadership, in

concert with others, can prod China

in constructive directions. Successful

Chinese companies will recognize

foreign sensitivities. Other countries

can assist China’s adaptation by clar-

ifying expectations, boosting trans-

parency, encouraging reciprocity and

supporting systems of fair rules.

These standards and strengths, not

gratuitous name-calling, show Amer-

ica’s face to the world.

Mr. Zoellick is a former World

Bank president, U.S. trade represen-

tative and deputy secretary of state.

By Robert B. Zoellick

The Trump administration

has failed to convey an

impression of strong

international leadership.

From the April 7 Future View on

the Journal’s website, in which col-

lege students were asked if they’re

owed a refund:

Hearing my fellow students com-

plain about missing graduation cere-

monies, dances and socializing

makes me sick. The coronavirus pan-

demic is expected to kill hundreds of

thousands of people and destroy the

livelihoods of many millions more. A

refund for their troubles—do these

students hear themselves?

Universities across the U.S. are

making great efforts to switch to on-

line learning and accommodate stu-

dents. This is all we can expect in a

difficult situation. Most schools

aren’t in a position to refund us,

anyway. They have significant out-

standing costs, including teachers

who need to be paid....

University is about teaching and

learning, which continues online. Ev-

erything else is excess.—Ian Rider,

University of California, Davis, polit-

ical science

The move to remote education is

tearing away the veil that has ob-

scured the pricing model in U.S.

higher education. When buildings

are closed, administrative services

are no longer available and libraries

transition to online-request fulfill-

ment, we students are left with the

“basic package.”...

If we count up from zero, adding

the services students now receive,

we realize something remarkable:

The difference between the value of

the basic package and the value of

the full package is absurd. With all

the add-ons, we are being ripped

off....

Menu pricing should become the

norm in higher education. That way,

if I don’t want to subsidize and use

the new outdoor swimming pool at

the university gym, or I don’t plan

to use the free psychological ser-

vices with three-month wait-times, I

don’t have to pay for other students’

use of them. Give me the basic pack-

age.—Logan Crossley, Northwestern

University, law

Notable  Quotable: Refund