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Stimulation , March 25th, 2020
Summary in Brief
- On March 24th, the S&P 500 gained over 9%, the best single day performance since 2008.
- Performance was driven by historic, multi-dimensional and bipartisan support from the US government related to fighting economic damage from COVID-19:
- Continued and diverse monetary stimulus from the Federal Reserve.
- Expectation of a completed fiscal stimulus package out of Washington to help combat the economic weakness due to the global pandemic, COVID-19. – Late last night/early this morning, the Trump administration struck a deal with Senate Democrats and Republicans on a historic and bipartisan stimulus package, equating to over $2 trillion, which should provide significant aid to individuals and companies.
** The stimulus package must still be voted on in the Senate and the House (expected today) before getting to President Trump’s desk for final approval.* *
– While optimism has risen related to the ability for the US to avoid economic depression, a recession in the US remains ‘base case’ for many investors.
Whatever It Takes Part II In 2012, while Europe was continuing to struggle with a sovereign debt crisis, Mario Draghi (then president of the European Central Bank), made a saying famous with financial institutions and pundits. When describing the economic conditions and what the ECB would do to support its constituent countries, Mr. Draghi said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” This statement came to mind this past week, as the economic damage from COVID-19 became increasingly clear and the US Federal Reserve and US Treasury began implementing policies in a “whatever it takes” fashion.
On Monday, the Federal Reserve announced multiple measures of monetary policy, primarily targeting asset backed and corporate bond markets to keep markets liquid and functioning:
- Unlimited Quantitative Easing (QE) through the purchase of US treasuries and agency Mortgage Backed Securities (MBS).
- Expanded the current QE activities to include both Residential and Commercial Mortgage Backed Securities (CMBS).
- Re-established TALF (Term Asset-Backed Securities Lending Facility), under which the Fed will lend on a non-recourse basis to institutions who buy securities backed by small business loans, student loans, credit card loans, and auto loans.
- Expanded the current money market facility to include securities issued by municipalities.
- Established a $300B credit facility, termed the Secondary Market Corporate Credit Facility, to purchases corporate bonds, loans and Exchange Traded Funds. This is the first time the Fed has stepped into the equity market.
Stimulus, Stimulus and more Stimulus (details on the stimulus) The economic aid package released by the Senate is focused on providing support for individuals and employees that are impacted by COVID-19, as well as companies within industries highly impacted by the decline in economic conditions. The $2 trillion stimulus package is historically large and has largely doubled
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in size in only a few days. For context, the stimulus package during the Global Financial Crisis equated to $800B, less than half the size of the currently proposed stimulus.
- Direct payments to households ($1,200 per person and $500 per child)
- Aid to increase in unemployment insurance (increasing benefits by $600) and to expand the scope of those qualified for unemployment insurance
- Over $350B loan facility for small businesses to help meet payroll costs and reduce future unemployment
- $500B in support for specific industries, state and local governments (includes $50B for US airlines)
- $150B to support hospitals and other health care-related businesses
COVID – 19 Continues to Accelerate Outside the US
The number of active cases of COVID-19 has quickly risen in Europe. Italy, the first country in Europe to be highly impacted has begun to see cases slow, while Spain has recently risen significantly in active cases and deaths. Total cases on a worldwide basis are now over 400,000, having risen by over 100,000 cases in the last three days.
Health officials around the world continue to be highly concerned with “flattening the curve” and therefore the spread of COVID-19. Earlier this week, India’s Prime Minister Narendra Modi, has issued a nationwide lockdown for 21 days. This is globally significant for multiple reasons; first, India is the second most populated country in the world, accounting for approximately 20% of global population. Second, as India has had approximately 500 confirmed cases, shows the country is taking more preventative measures than most other countries, hopefully drastically limiting the spread and impact.
The combination of US monetary policy and the recently agreed-in-principal fiscal stimulus package will help reduce uncertainty for many individuals and businesses in the US. These policies will likely help stabilize sentiment and investor confidence, ultimately providing some stabilization to capital markets. While the economic impact cannot be totally avoided, and we expect economic data (ranging from employment data, GDP growth, retail sales, etc.) to be significantly impacted, the actions taken by both the Federal Reserve and the U.S. government should help cushion some of the blow over the long-term.
In the short-term, the continued spread of COVID-19 throughout Europe and the United States will continue to place pressure on risk assets. Recall that after Troubled Asset Relief Program (TARP) was passed on November 23, 2008, the S&P 500 declined 15% further. Programs like TARP and today’s contemplated stimulus package, while they likely help avoid ‘worst case scenario’ like another Great Depression, it does not necessarily avoid a recession.
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This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.
All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.
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