S&P 500 2541 +10.3% for the week 10-year Treasury yield 0.75%
Encouraged by dramatic fiscal and monetary policy moves, the stock market rebounded from its deeply oversold condition last week. The S&P 500 advanced 10.3% for the week, and the Dow Jones Industrial Average made its largest one-day point gain in history with a gain of 2,113 points on March 24th. Bond prices rose as the yield on 10-year Treasuries fell to 0.75%.
Numerous major developments unfolded as the government responded to the coronavirus crisis. These included a historic $2 trillion fiscal stimulus package, dramatic action by the Federal Reserve, and President Trump expressing hope that parts of the economy may return to business by Easter.
$2 trillion rescue package
Throughout the week, progress was made on a historic fiscal stimulus bill totaling over $2 trillion. After a few delays, the bill finally passed both houses of Congress with bipartisan support and was signed by the President on Friday, March 27th. The market wanted to see a major stimulus package as soon as possible, and the government rapidly delivered a comprehensive package of measures to help the economy. The President and Congress wanted to “think big” on the stimulus bill, with the goal of spending whatever is necessary to protect the U.S. economy.
Key features of the bill include:
- $260 billion in expanded unemployment benefits
- $500 billion in direct payments to individuals
- $400 billion to support small businesses
- $240 billion for public health
- $150 billion for state and local governments
The IRS is expected to send money to millions of Americans in the next few weeks, with a typical family of four receiving $3400. One of the bill’s major provisions involves lending for small business. All small businesses will be able to obtain loans to meet their payroll and other expenses for two months, and if they retain their employees, the loan will be forgiven.
Federal Reserve action
In the meantime the Federal Reserve has also adopted a “whatever it takes” approach, and is taking unprecedented action to help backstop the economy and keep credit available. Last week the Fed set up several new lending facilities to provide loans to small business and investment grade companies, as well as to buy corporate bonds.
The Fed now has up to $4 trillion in lending power, based on 10:1 leverage on a fund of $400 billion. This provides tremendous firepower for making loans to help small business and distressed industries, which should serve as a backstop and give markets confidence that the economy will not collapse.
The Fed is also undertaking a program of unlimited quantitative easing, buying bonds and expanding its balance sheet, similar to the actions taken during the 2008 financial crisis. However the recent bond buying program has been on a much bigger scale. After the 2008 crisis the Fed was buying roughly $60 billion of Treasury bonds per month. Recently they have been buying $50 billion of mortgage-backed securities per day, or a total of $250 billion in one week.
Sharp economic downturn expected
These dramatic moves have been necessary because the economy is expected to plunge in the second quarter. Economic data showing evidence of the downturn began last week, as the weekly initial jobless claims skyrocketed to 3.28 million. Despite the fact that the unemployment rate was recently at historic lows of only 3.5%, many predict that it will temporarily spike to the 10% – 15% range, or even higher, in the months ahead.
President Trump expressed hope that large parts of the country might return to normal by Easter (April 12th), saying that we can’t keep the whole economy shut down for too long, as the cure can’t be worse than the problem itself. However on Sunday, March 29th the President has just extended the social distancing guidelines until April 30th, and stated that Easter is now the expected timeframe for when the death toll from the virus is expected to peak.
Over 100 million Americans now are subject to “shelter in place” orders, and the economy is expected to remain very weak for at least the next month or two. A sustained market rally is likely to require evidence that the spread of the virus has been contained. Recent developments suggest a lot of progress on virus therapies, and there is hope for treatments using various anti-malaria drugs, but at this stage the effectiveness of such medications is unclear.
Conclusion
The total rescue package unveiled last week includes $2 trillion in direct assistance, combined with $4 trillion in potential lending power from the Federal Reserve, for a total of roughly $6 trillion. This will provide urgently needed relief to businesses and workers and should prevent the economy from going into a major, long-lasting recession.
The S&P 500 index reached a peak of almost 3,400 in mid-February. On Monday, March 23, it hit a low of roughly 2,200, down 35% from the high, in a very short time. Thus a lot of bad news has been priced in, and the market reached an extremely oversold condition by many measures. This set the stage for a rebound, and the market rally last week was an encouraging sign that a short-term low may have been reached.
However the situation remains fluid, and the market is likely to remain volatile for some time amid rapidly unfolding news developments regarding the virus and the economy.
We will discuss all of these issues in more detail in our first quarter review letter, which will be available at the beginning of April.