Head - NAM Investment Strategy
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Following the fastest ever drop in US equities, the authorities have prepared the way for an ultimate transition from virus-hit to virtuous economic cycle.
Congress passed a $2 trillion relief package to cap the biggest US policy week ever. The package provides relief to hospitals, workers, people and companies in need of cash. Although substantial, at 9% of GDP, more relief will likely be needed to meet the vast economic challenges posed by the COVID-19 pandemic, with the ultimate amount depending on how long it takes to safely resume a more normal way of life.
The deal follows the fastest 30% fall by the S&P 500 in history, at just 22 days. There is an old saying on Wall Street that markets panic until policymakers do. Markets have since paired back some losses on the news and heading into month-end rebalancing. The stimulus includes up to $2,400 for married couples and $500 per child, plus increased and longer unemployment benefits, and $350 billion in loans/grants for small businesses. There is $500 billion for ailing industries that comes with oversite. There is also $150 billion for states and localities, $100 billion for hospitals, plus additional funds for health-care relief, public transportation, farmers, and the postal service.
The fiscal aid comes after the Federal Reserve announced a series of programs on March 23 to help markets function more efficiently, including a pledge to purchase assets without committing to a set limit. Other efforts include a lending program for Main Street businesses to supplement efforts by the Small Business Administration (SBA), and a resurrection of the Term Asset-Backed Loan Facility (TALF) used during the Financial Crisis.
The announcement marks the Fed’s most aggressive action to date, including those taken during the Financial Crisis. The Fed previously lowered interest rates to a range of 0.0%- 0.25%, announced it would buy $500 billion in Treasury bonds and $200 billion in mortgaged-backed securities. However, we are now in a new phase of open-ended QE, which includes a new facility to buy investment grade corporate securities directly from issuers, the Primary Market Corporate Credit Facility (PMCCF), and another to buy them in the secondary market, called the Secondary Market Corporate Credit Facility (SMCCF).
To kick things off, the Fed bought $125 billion of securities every day this past week. Separately, the G-20 has committed to doing whatever is necessary to restore growth, and pledged at least $5 trillion collectively. The White House is using the Defense Production Act to mass produce test kits and masks with the production of ventilators also ramping up.
We continue to expect bleak economic news in the months ahead. Still, these policy actions and those that follow should strengthen market functioning and help the economy handle its immediate challenges, which we see as prerequisites for the ultimate transition from a vicious virus-market-economic cycle to a virtuous one. Stay safe and stay tuned!