The U.S. Government Steps in to Support the Markets and the Economy

Posted in , By David M. Smith

In the current environment, it is difficult to give a short summary of events from the last couple of days, let alone a whole week.  My apologies in advance for the lack of brevity.    

The situation for the last couple of weeks has been grim.  In the U.S. and other developed countries, new COVID-19 cases are rising exponentially.  Governments are reeling and trying to get a handle on things.  Businesses are closing down or scrambling with contingency plans for customers, clients, employees, and offices.  The markets are in upheaval with volatility levels not seen in decades.  The stock, bond, and money markets showed signs of stress.  And traditional safe-havens gold and U.S. Treasury bonds were volatile as well.   

If the capital markets quit functioning properly it creates additional risks.  And major industries such as airlines, hotels, and restaurants, will need assistance to get through this.  If the markets are left to get worse or businesses left with no support, the danger is that the current event-driven bear market could turn into a much worse structural bear market.  These are challenges that only governments can step in and solve.

In the first half of March, the U.S. Federal Reserve slashed short-term rates to near zero.  Then just over a week ago, it announced Quantitative Easing (QE) and said it would buy $500B in U.S. Treasuries and $200B in mortgage-backed securities to stabilize the bond markets along with backing money markets.  CNBC  MarketWatch  Due to the Fed's QE last week, U.S. Treasury bond prices stabilized and quit gyrating.  QE was working to stabilize markets.  But the Fed wasn't done.  This Monday, the Fed announced it would buy unlimited amounts of Treasury bonds and mortgages, as well as keep credit flowing to corporations and state and local governments.  Bloomberg  This was the equivalent of shooting a monetary bazooka at the capital markets.  And so far, it has worked.  Hopefully, it will keep capital markets functioning properly and reducing that risk.  But this problem also requires fiscal support.

Enter Congress.  Early Tuesday, a deal was reached in DC on a $2T stimulus package.  WSJ  The fine details have not been released but it will provide financial checks to many Americans, loans to small and large businesses, dramatically expand unemployment benefits, and provide more resources to healthcare providers.  This should go a long way to help stabilize the economy during the severe downturn.  Stock markets rejoiced and had their best day since 1933.  Yahoo Finance  And the gains continued on Wednesday.

This week, markets are stabilizing and stocks recovering.  Is it time to raise the checkered flag and claim victory?  Not yet.  New cases have only started stabilizing in Europe and the U.S. is at least a week behind their efforts.  Some of the headlines for the next month or two on rising cases, deaths, and health care systems strains will be horrific.  Businesses are still shut down and some have closed permanently.  The $2T legislation should pass party votes but when will individuals and businesses receive assistance?  Will $2T be enough?  And will the virus be in the rearview mirror by summer or will we be dealing with shutdowns for a year or more until a vaccine is ready?  There are still plenty of unknowns. 

With that said, despite what the near future may bring, enjoy the good market news this week.  We have all earned it.  Stay safe out there.

  • Will They Find a Vaccine?  The race for a vaccine for COVID-19 is accelerating at a feverish pace.  It is encouraging to see a sense of urgency and cooperation among researchers.  The Economist  Science
  • Does Social Distancing Work Better Than Forced Quarantine?  This simulator shows the effects of which actions may "flatten the curve" the best.  I found it helpful in understanding the different impacts of doing nothing, forced quarantine, and social distancing.  Wash Post
  • Who's Hiring?  Amazon said it would hire 100,000 workers, especially those who lost jobs from businesses hurt by the economic slump.  Walmart, CVS and other firms doing brisk business during the  shut down may do the same.  CNBC
  • Life Changes Due to the Virus?  The predictions are coming in on how COVID-19 and social distancing will alter business, society, and culture.  I have a few predictions myself:  Remote work will be more prevalent; online learning goes mainstream (watch out expensive universities!); there will be a baby boom in 9 months (and, unfortunately, maybe an uptick in divorces); many first-run movies will skip theatres and go straight to streaming, and there will be an increase in home-cooked family dinners.  Do you have any predictions on how life will change?  If so, send them along, I'd love to hear them!  Politico
  • You Are Now Entering the Twilight Zone:  Imagine being off the grid for a month and returning during a global pandemic that changed everything.  Well, it happened to these rafters while on the Colorado River.  When told what was happening in the world, they thought it was a joke.   NYT
  • Simple Exercises are Back:  Running is seeing an uptick in popularity as are other basic exercises you can do alone or outside while practicing social distancing.  NYT
  • Time for a Virtual Coffee Break, Tea Time or Cocktail Hour:  We are social creatures needing interaction which can make social distancing and sheltering in place difficult.  Many are turning to virtual coffee breaks, tea time, and happy hours to interact with family and friends.  I recently joined friends via video for a virtual happy hour and had a lot of fun.  How about you?  WSJ

About the Author David M. Smith

David is a Senior Financial Advisor and the firm’s Co-Chief Investment Officer. He has more than 20 years’ experience in the financial services industry and holds the highly respected Certified Investment Management Analyst™ and Certified Financial Planner™ designations; he is a Co-Managing Member of the firm.
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