KEY POINTS FOR THE WEEK
- An additional 6.6 million workers filed new claims for unemployment in response to the economic slowdown caused by the coronavirus.
- The Federal Reserve announced or adjusted programs for $2.3 trillion in support to sustain the economy during the shutdown.
- Stocks soared more than 10 percent as investors expressed optimism the spread of COVID-19 would continue to slow and the economy could start to open.
Investors were faced with a combination of optimistic and pessimistic news this week and opted to accentuate the positive. Health care data reinforced the gradual success social distancing is having in curtailing the spread of the virus. New York reported a decline in ICU patients. Europe continues to see declining new case counts, and some European countries are adjusting social distancing rules to allow some businesses to reopen. On Thursday, the Federal Reserve announced $2.3 trillion in support for businesses, state and local governments, and holders of riskier bonds.
Massive unemployment claims led the pessimistic news. More than 6.6 million people filed a claim for initial unemployment, and the previous week’s number was revised higher, to 6.8 million claims. Continuing claims neared 7.5 million and are now higher than the peak claims during the financial crisis in 2009. The official number of fatalities attributed to COVID-19 topped 100,000.
Markets look forward, and the optimistic news was well received by investors. The S&P 500 soared 12.2 percent last week. Global stocks participated in the rally as the MSCI ACWI roared 10.5 percent higher. The Bloomberg BarCap Aggregate Bond Index gained 0.6 percent as the Fed’s efforts to improve bond market liquidity supported bond prices.
Expect markets to remain driven by news surrounding expectations on how COVID-19 will affect markets and companies. The regular announcements of medical data and unemployment filers will remain important as well as retail sales data for the United States and China. Of new interest will be corporate earnings data and the conference calls providing commentary about the last quarter and future prospects. Those calls will give investors more understanding on just how hard the virus and social distancing are affecting prospects.
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
IN THE FED WE TRUST - EPISODE II
Remember when the Federal Reserve raised interest rates at a steady clip in 2017 and 2018? Remember the criticism of Fed chair Jerome Powell by the president and others? Those rate hikes and the criticism have all but vanished as the Fed continues to take steps to maintain functioning credit markets and allow those being hurt by the crisis to continue to receive debt financing. The debt taken on allows firms to buy time for the economy to start opening up.
The Fed’s balance sheet has exploded in recent weeks as it continues to issue dollars to purchase debt or lend directly to large borrowers. The accompanying chart shows how quickly the Fed’s balance sheet has grown, which serves as a proxy for measuring how much it is doing to sustain borrowers through a period of forced economic weakness.
That balance sheet includes a host of assets and programs the Fed has purchased to support markets. After cutting rates to zero, it announced it would purchase large chunks of federal debt and government-backed mortgages. When money market funds looked to be in danger of seeing their prices drop below $1, the Fed announced it would accept those assets as collateral for loans.
This week it announced plans to lend directly to states and local governments. The lack of commerce from closed businesses has pushed sales taxes lower. Mid-sized companies, whose needs may be hard for a bank to meet in troubled times, but are still too small to tap corporate debt markets, will benefit from a Fed program to encourage banks to lend to the mid-sized firms and then sell 95 percent of the loan to the Fed.
Corporate bond yields dropped last week when the Fed announced it would begin purchasing high-yield bond ETFs, allow some downgraded firms to access credit based on their credit situation prior to the virus, and support additional asset-backed securities.
The swift and large response as problems come up has been a key part of the stock market rally in recent weeks. The Fed has a larger balance sheet and is stepping into more markets as part of its efforts. Even the acrimony between the Fed and the Trump administration has been replaced by excellent cooperation with the Treasury department. The Fed learned from 2008, and we are reaping the benefits of those lessons learned.