The market returned from the Easter holiday with a small retrenchment of 1% for the S&P 500. Despite the small pullback, the S&P has been able to post a gain of nearly 11% over the last five trading days as investors have taken a more positive stance on the recent monetary and fiscal actions and that the news on the public health front has improved.
On Thursday, the Fed provided details on their plans to spend $2.3 trillion through the various programs authorized through the Treasury. These programs were funded in the CARES act passed by Congress on March 27th. This includes loan programs to banks to help support the Paycheck Protection Program (PPP), $600 million in funding for the Main Street lending facility targeting medium sized businesses and $500 million targeted at shoring up municipal finances that have been hard hit by the virus. The announcement also provided more details around the assets they will be purchasing in their various vehicles and the allowable collateral. Based on the Fed’s default assumptions, they are leveraging the funds provided from the Treasury by as much as 10 times to purchase corporate and municipal bonds. A surprise in the announcement was that the Fed would consider purchasing bonds downgraded to below investment grade as long as they were rated investment grade before the crisis began and had only fallen one notch. These downgraded bonds are often referred to as “fallen angels”. They also announced they would consider buying shares of ETF’s that invest in high-yield bonds. These announced actions confirmed the Fed’s position that they will undoubtedly be the backstop for the credit markets and the debt and equity markets were buoyed by this notion.
Also last Thursday, investors were monitoring closely the OPEC+ meetings looking for an agreement on production cuts ending the stand-off between Russia and Saudi Arabia. After some final hour diplomacy settled a dispute over Mexico’s production cuts, a final agreement was completed on Sunday. This resulted in a headline production cut of 9.7 million barrels per day for the next two months and then drops to 7.7 for the rest of 2020. When factoring in US production declines and purchases for the strategic petroleum reserves by several countries, it is being argued that the nearly 20 million barrels per day are being removed from the market. It is estimated that with the global economic slowdown, oil demand has fallen by 25 to 30 million barrels per day and we are quickly reaching capacity on storage. Due to this near-term concern and despite an agreement being reached, oil prices declined slightly on Monday. Until the market can get comfortable that actions are having an impact on the excess oil inventories, crude prices could remain challenged near-term. These actions will be a positive for the oil markets longer-term.
The US has seen a sharp rise in jobless claims with a total of 16.8 million claims filed over the last three weeks. This has reinforced the need for monetary stimulus, especially the segment of the economy being most impacted, small businesses. This week the direct payments to employees will be hitting bank accounts and last week the rollout of the SBA loan program in support of the PPP began in earnest. The demand for this support has been overwhelming and will quickly use the initial allotment. Congress is already discussing a fourth package to expand this program by an additional $250 million as well as other programs. Both the House and the Senate are scheduled to return to session on April 20th and take up discussions on this topic. The early packages were passed quickly with a feeling of urgency pushing swift action and reducing political strife. We believe further packages will become more contentious as political differences become more apparent.
We remain in unchartered waters for both the economy and the virus. Looking forward the first quarter earnings season begins this week and will be closely watched for management’s outlook and any financial stress within the companies. This will be a tough task for the executive teams, as the biggest outstanding questions are outside of their control. In addition to earnings, the markets will be looking towards Washington for any progress they can make on the fourth stimulus program and guidance from the healthcare experts on when a reopening of the economy can occur and what that really looks like. Debt and equity markets have been performing better of late, but the uncertainty remains high and with that we would expect volatility to remain elevated. We continue to reinforce that in times of stress, investors should follow their investment plan and not attempt timing the market. If you are uncertain about your plan and level of risks you are taking, speak to your advisor.
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