Monetary and Fiscal Stimulus to Help Stem Longer Term Economic Fallout
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 3/20/2020. Rates and Economic Calendar Data from Bloomberg as of 3/20/2020. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets moved decisively lower last week. In the U.S., the S&P 500 Index moved into bear market territory and finished the week at a level of 2,305, representing a 14.95% loss, while the Russell Midcap Index retreated 18.13%. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -16.14% over the week. On the international equities front, both developed and emerging markets also finished in the red for the week, returning -5.76% and -9.79% respectively. Finally, the 10-year U.S. Treasury yield settled in at 0.92%, little changed from the previous week.
There wasn’t a major asset class that was able to avoid last week’s sell-off as equities, fixed income, and commodities alike felt the pressure. Investors fear the unknown, which in this case refers to the length and magnitude of the impact that the novel coronavirus will have on the global economy. Medical expert forecasts vary widely for peak cases. Even major research houses are speaking more openly about the uncertainty in their projections. All they can do is model several scenarios and look for indicators of how this will unfold as more data comes in.
However, it is also important to consider what is known. While the time-frame for the virus in our country is currently unclear, it is clear that the federal government, local governments, and private industries are doing everything in their respective powers to help limit the impact of the virus on human life and the economy as a whole. First, let’s look to the Federal Reserve (“Fed”) who has stated and proved they are committed to supporting households, businesses, and the economy as a whole through these challenging times. The following are some of the more pronounced examples of the robust support being provided by the Fed.
• Cut the Federal Funds Target Rate to a range of 0.00% – 0.25%
• Implemented a new $700 billion quantitative easing program through the purchase of U.S. Treasuries and mortgage-backed securities to provide liquidity to the market
• Announced they will be purchasing an “unlimited amount” of U.S. Treasuries and mortgage-backed securities and now also purchasing agency commercial mortgage-backed securities as part of an expansion of its overall asset purchase program.
• Launching a commercial paper facility to help limit breakdowns in this critical area of financing for many companies
• Plan to launch new lending facilities aimed at supporting corporate credit markets
Keep in mind that the list above is only related to the U.S. central bank. Central banks around the globe have also made similar commitments and put in place a tremendous amount of support for their respective economies and businesses.
Fiscal policy will also play a vital role in aiding businesses and the American people. Bi-partisan spending packages have already been put into place, providing over $100 billion in support and resources to agencies such as the CDC and FDA, as well as providing aid to businesses and employees affected by the massive disruption. Focus is now back on Washington and a proposed stimulus plan, which is expected to deploy nearly $2 trillion worth of aid. Unfortunately, the U.S. Senate failed to ratify two iterations of the plan at the time of this writing. Although the news may have been a disappointment, and markets reacted accordingly, there are a few bright spots. The amount of stimulus has doubled since early talks, and this is a bi-partisan effort as both parties recognize the need but are currently not agreeing on deployment and terms. Discussions and negotiations continue in the Senate and we are told that they are getting closer and closer to making a deal.[UPDATE: The Senate and White House agreed to a $2 trillion relief bill after midnight early Wednesday morning. The House will now vote on the proposal.]
What does this mean for markets and investors? We will get through this as we have other financial downturns remembering that this time is different than many other downturns as this is an event-driven sell-off as opposed to a fundamentally driven market collapse (see last week’s market update for more details). Support systems are being put in place and we could see a stark rebound in business activity, and in turn stock prices, during the latter stages of the second half of the year provided that the pandemic is behind us at that point. Numerous studies show that trying to time the market is detrimental to long-term portfolio performance so we encourage investors to resist the temptation to try and time when to exit and re-enter the market and instead revisit and reassess their financial plan, investment strategies and current asset allocation with experienced financial professionals. As always, we stand ready to help provide guidance and perform any investment portfolio or financial plan reviews.
Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment Trusts (UITs) consistent with several of the portfolio management ideas for consideration cited above.
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