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INVESTMENT STRATEGY

The Fed's Pandemic Promise

Though we are still in the midst of the COVID-19 pandemic, financial markets are now in a much different place than they were just three months ago. After one of the sharpest declines in U.S. stock market history, the S&P 500 rallied in the second quarter. As states began to reopen, the index advanced +20.5% and at the close of the second quarter was only down -3.1% for the year, despite a recent uptick in cases in mid-June.

The market rally can be attributed to the unprecedented comments made by Federal Reserve Chairman Powell early in the quarter stating the Fed would do “whatever is necessary to support and stabilize financial markets.” This gave the market a glimmer of hope, contributed to the market’s rebound, and has kept it afloat ever since with record-breaking stimulus funneling money directly to the private sector.

Here are 5 things the Fed has done in response to the pandemic:

  • Kept interest rates near 0% – they have also stated that they will keep rates low until the economy has shown it has weathered recent events
  • Bought over $2 Trillion in Treasuries as well as residential and commercial mortgage-backed securities
  • Encouraged banks to lend more to small businesses and corporations by allowing another $2 Trillion to be borrowed from the Fed at the lowered interest rate
  • Began buying eligible high yield and corporate bonds by purchasing fixed income index funds traded on secondary markets (this marks the first time the Fed has taken such action)
  • In total, expanded the balance sheet to roughly $7 Trillion, exceeding the post-financial crisis peak of $4.5 Trillion

Our Outlook: Bearish

Even with record stimulus packages, the road back to 2019 economic growth levels is likely to be long with some dips along the way. As we head into the second half of 2020, we are still asking ourselves three main questions regarding COVID-19 and its effect on the economy and markets:

  • How successfully can states and the U.S. as a whole reopen their economies, while controlling the spread of the virus?
  • Will stimulus from the Fed remain efficient and sufficient enough? Does it reach households and businesses?
  • Are there any signs of permanent financial scarring?

The answer to these questions are still unknown, but they all present possible headwinds to the market over the next 6 months and even into 2021.

We are here to help

While no one can be sure how long the current crisis will last, we continue to map and measure the data every day. Ultimately, this is a time to be prudent risk managers, but it is also a time to prepare for future investment opportunities.

With so much uncertainty facing both the markets and the economy, we are committed to helping our clients effectively navigate this challenging investment environment. If you believe your portfolio could benefit from our disciplined risk management, please don’t hesitate to contact us.

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