On Wednesday, the Senate agreed on a $2 trillion stimulus package to mitigate the effects that COVID-19 will continue to have on the economy. This stimulus, in combination with actions the Federal Reserve took earlier in the week, caused financial markets to recover a small portion of the losses incurred over the last month. The stimulus package is focused on providing cash and loans to individuals, small businesses, and industries that have been most affected. The timing of the stimulus could be an issue as cash payments to individuals are not expected to go out until May. Until then, many newly unemployed will have to bridge the gap.
We believe the Fed’s somewhat under-the-radar action to begin purchasing corporate bonds (and not just treasuries) was an important step toward stabilizing credit markets. Not only did the Fed authorize the purchase of individual bonds, it also authorized the purchase of bond ETFs. The Fed explained that it would buy ETFs that “provide broad exposure” to the U.S. investment grade corporate bonds. This should establish some price support for and inject liquidity into the bond market.
While we see the stimulus package and the Fed’s actions as good news that the government is trying to get out in front of current and upcoming stress, we remain in a “wait and see” mode with respect to investing while we wait for the world to better understand the extent of COVID-19’s spread. Estimates vary on when certain cities and countries will feel the worst of the effects and how bad the worst will be. We are also concerned that certain communities may get back to “normal life” too quickly, potentially pushing out the recovery even longer.
We believe that developments in the next two weeks will give us a much better idea of the extent and effects of this crisis. Negative developments would be exploding infections, a spiking death rate, overwhelmed hospitals, and irreversible, long-term economic and social damage. Positive developments would be that the measures taken in late March “flatten the curve” and that the rate of death slows. Our moderately “positive” outlook is that normal economic activity will gradually return, though certain industries may never recover (e.g., cruise ships). Developments in the next two weeks should inform which of these outcomes is more likely. Until then, we remain cautious.