Another volatile week netted a substantial recovery rally from last week’s CoVid beat down. Global equity markets posted double digit gains on the back of a record $2t stimulus bill passed by the U.S. Congress and signed into law on Friday. The beginning of a string of dire CoVid-19 related economic reports commenced this week with skyrocketing jobless claims and bleak survey data. The collision between public health policy and economic impact is just beginning, with depth, duration, and thresholds largely unknown. Upcoming 1Q earnings reports and a steady stream of economic reports should begin to fill in the margins around the closely watched CoVid-19 data in the coming weeks. Elevated volatility is a given in the short-term while long-term investors continue to pick their spots for rebalancing exercises. With a monetary response and fiscal response in hand, markets will anxiously await improvement in the virus data (‘curve flattening’) for sentiment to begin to stabilize.

Market Anecdotes

  • The S&P 500 fell -33.9% from its record high February 19 but last week’s rally brought it back to -25% and approximately 7% above the December 2018 lows.
  • Investment grade bond spreads have begun to narrow on the back of Fed monetary actions. The current level of spreads implies nearly 2% default rates which has never occurred.
  • Bloomberg’s U.S. Economic Policy Uncertainty Index recorded its highest reading in history, another historically encouraging contrarian indicator.
  • AAII sentiment measures have not yet reached washed out levels with bearish at 52% and bullish at 32.9%.
  • Widespread reports of China’s economy normalizing intermingled with concerns over a re-emergence have the rest of us doing Covid-19 horizon math of our own.
  • The Fed made a Monday morning announcement of an alphabet soup of programs designed to restore market liquidity and functioning.  Several were pulled off the shelf from the GFC, but additional facilities and programs have been added to the mix.

o Fed now buying new issue (PMCCF) and secondary market (SMCCF) corporate bonds

o Fed now buying high quality municipal bonds

o Fed announced unlimited QE for treasuries, MBS, and now also agency CMBS

o Fed lowered the Fed Funds rate to 0%, discount rate to 0.25%, and req reserves to 0

o Fed re-introduced an asset backed securities liquidity fund (TALF)

o Fed launched liquidity funds for money markets (MMLF) and commercial paper (CPFF)

o Fed launched a primary dealer credit facility (PDCF)

o Fed significantly expanded USD liquidity swap lines with several global central banks

o Fed will begin lending to small businesses to compliment SBA loan programs

  • Congress delivered the largest fiscal stimulus package in history last week, a $2t package, the CARES Act.

o Tax refund/direct payments to individuals and families

o Additional unemployment insurance benefits

o Corporate and small business loan facilities (rent, salaries, utilities)

o Direct corporate lending and aid packages (government stake)

o State and hospital/healthcare infrastructure aid package.

Economic Release Highlights

  • Weekly jobless claims of 3.283mm represent the first wave of CoVid related economic impact.
  • March flash U.S. PMI reflected the clear beginnings of CoVid impact at 40.5c, 49.2m 39.1s.
  • February durable goods orders increased 1.2% which are not reflective of CoVid world activity.
  • February new home sales of 765k didn’t slow down at all from the 13-year high posted in January (764k) but aren’t reflective of CoVid world activity expected in April-May.