Members of the Waverly Advisors Investment Committee have been through many market downturns and quite a few bear markets in their careers. While each market swing is different, there are some common lessons in each one. Walt Disney once said, “The past can hurt. But the way I see it, you can either run from it, or learn from it.” Currently, we are seeing an unprecedented fiscal response by the Treasury Department to the Coronavirus and equally bold moves in monetary policy by the Federal Reserve (Fed).
We thought it might be helpful to take a moment and review exactly what is being done to confront the potential impact on the economy and the markets caused by the spread of COVID-19.
- March 3, 2020 – the Fed made the largest rate cut since the 2008 financial crisis.
- March 12, 2020 – the Fed massively expanded reverse repo operations (overnight lending to banks and other financial institutions), which has added over $1.5 trillion of liquidity to the banking system.
- March 15, 2020 – the Fed cut interest rates again, and this time, by a full percentage point. The Fed also reinstated Quantitative Easing (QE) with the purchase of $500 billion in Treasuries and $200 billion in mortgage-backed securities, which provides more liquidity, improves financial conditions and keeps rates low for loans that are based on government securities, such as mortgage loans.
- March 16, 2020 – the Fed increased reverse repo operations by another $500 billion.
- March 17, 2020 – US Treasury Secretary Mnuchin approved the Fed’s creation of a Commercial Paper Funding Facility (CPFF), which allows the Fed to create a corporation to purchase commercial paper. It also authorized up to $10 billion to help cover losses from this program. The purpose of this action was to make sure short-term loans are available for credit-worthy corporations.
- March 17, 2020 – the Fed received approval to re-launch the Primary Dealer Credit Facility (PDCF), which will offer short-term loans to banks.
- March 18, 2020 – the Fed announced the Money Market Mutual Fund Liquidity Facility (MMLF) in order to provide orderly transactions as part of the credit market used extensively by all investors. The Treasury is offering up to $10 billion to cover loan losses that the Fed may incur with this program.
- For the week ended Friday, March 20, 2020 – the Fed purchased $322 billion of mortgage-backed securities and treasuries, which is a record amount for any one week in history.
- There is discussion that a 50-year government bond may be issued to take advantage of the ultra-low interest rates and help finance the cost of the various Coronavirus stimulus packages.
- March 6, 2020 – Phase One of an $8.3 billion spending bill is signed into law. It is intended to help fight the pandemic and to fund vaccine research. It will also provide money to state and local governments that are fighting the spread of the virus and allocate money to help stop the virus spread overseas.
- March 18, 2020 – Phase Two, worth approximately $100 billion, is signed into law and will help ensure the availability of free coronavirus testing and provide paid sick leave for private sector workers under certain circumstances. It will also help expand food aid and unemployment benefits.
- Phase Three is currently being negotiated and is expected to provide economic relief and stimulus to individuals and businesses, especially those who are most affected by the slowdown in the economy. It is estimated that this proposal could exceed $1 trillion.
- President Trump announced a temporary suspension of student loan payments for 60 days and indicated that the time period may even be extended.
- Tax Relief – the federal tax filing day has been moved from April 15th to July 15th. Treasury Secretary Mnuchin said in a tweet “all taxpayers and business will have this additional time to file and make payments without interest or penalties.” It’s important to note that these deferral payments can include first quarter estimates for the 2020 tax filing season. He also encouraged taxpayers with refunds to “file now to get your money.”
It appears to us that all major players – Congress, Federal Reserve, Treasury Department and President Trump – are taking very bold action, and they seem to be moving more quickly than in the past, given the severity of the situation. While this is no guarantee that we will see virus containment and progress in terms of the economy and the market in the short-run, they are laying the groundwork to prevent the worst-case scenario from materializing.
As we have said in prior communications, there will likely be more bad news to come in terms of the virus, unemployment, struggling corporations and a shock to our economy; however, it is our view that the stock market already reflects this news, given the sell-off that has occurred since mid-February. The lesson we have learned from over 30 years of market ups and downs is that missing the rebound after an unpredictable event, like COVID-19, is the main reason that many investors fail to achieve their long-term objectives.
We will continue to monitor the effects of Coronavirus on our economy and the markets and will continue to provide frequent updates. Click here to view our Firm’s COVID-19 Resources page.
Jeff Helms serves as a Member and as a Senior Client Consultant with Waverly Advisors. He is also a member of the Firm’s Investment Committee. Click here to learn more about him or to reach out to him directly.