A Quick Response to the Fed’s New Stimulus

A Quick Response to the Fed’s New Stimulus

Today the markets responded very favorably to the Fed’s new stimulus, with the S&P 500 closing the day with a 209.93 point or 9.4% gain. This comes on the heels of a deep drop Monday due to Congress’s inability to agree on a fiscal stimulus package. The Fed’s new stimulus includes expansion of Quantitative Easing (QE) from $500 billion to unlimited to ensure liquidity in the capital markets. The Federal Reserve also resurrected the Term Asset-Backed Loan Facility (TALF) to support the flow of credit to businesses and consumers. It introduced the Primary Market Corporate Credit Facility (PMCCF) to facilitate funding for corporate bond issuers. The Fed also introduced the Secondary Market Corporate Credit Facility (SMCCF) to expand its buying of bonds to include investment grade corporate bonds.

While some of these programs are new for the Fed, they have been used by the Bank of Japan to support the economy and markets. Having gone through the financial crisis of 2008, the Fed learned what worked and was able to resurrect those programs.

The next support for the market will come from Congress reaching a fiscal stimulus plan. As of last night, the rescue package being discussed approximated $1.8 trillion. If we use 2008 as guidance, we know that the longer Congress debates, the larger the package will be. Last week they were talking $1 trillion, now almost $2 trillion and Pelosi is working on a $2.5 trillion package.

Social distancing should enable us to moderate the spread of the virus, but it is having a devastating effect on the economy – even if it is only in the short-term. Some hopeful news is that new cases of the virus in Italy have dropped for two days in a row. If this trend holds, it is exactly the same number of days (43) that it took for South Korea to reach its apex. Since the US is about 14 days behind Italy, we could see new cases peak in about two weeks – if the trend holds here.

While we expect the economy to recover quickly, it will not be overnight and we won’t know just how quickly until we see what Congress actually passes. However, since markets are anticipatory, we expect stocks to begin recovering well before the economy. Although I do not advocate market timing, it would not be surprising to me if markets begin recovering once the number of new Covid-19 cases begins to decline.

Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

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