We are all watching the acceleration in the number of COVID-19 cases across the U.S. with amazement. The exponential growth rate in these cases as testing improves and the virus spreads through the population gives us pause every day. We think about the impact on individuals and families and those on the front lines trying to treat those who have fallen most ill.

It seems global fiscal and monetary stimulus are also growing at an exponential rate. At last count, there has been almost $10 trillion worth of stimulus globally! That’s 11% of global GDP.  The U.S. accounts for almost half that amount, or $5 trillion in both stimulus through Federal Reserve action and Federal spending. Determining the impact on the economy and markets can be challenging, however there are a few conclusions we’ve drawn.

Monetary Policy

The Federal Reserve has been busy using programs implemented during the 2008 financial crisis and creating some new ones.  They have done the following:

  • Reduced the Fed Funds target interest rate to a range of 0%-0.25%
  • Committed to purchasing Treasuries and agency mortgage backed securities in the “amounts needed” (known as quantitative easing), a change from their previous commitment to buy $700 billion
  • Announced a $300 billion loan facility
  • Reactivated the Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility to provide liquidity to bond markets and corporate bond issuers
  • Reactivated the Term Asset Backed Loan Facility to enable issuance in the asset-backed security markets which include loans backed by student loans, credit card and auto loans
  • Reactivated the Money Market Mutual Fund Liquidity Facility and Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility to ensure the liquidity of money market funds as they meet withdrawals and maintain short-term funding for corporations

These actions are meant to provide a lower cost of capital to borrowers, keep markets open for borrowers, maintain liquidity in bond markets to stabilize their functioning and ensure money markets are able to meet withdrawals.

The Fed’s commitment to purchases in “amounts needed” signaled to the market that they will increase the size of their balance sheet as needed to inject liquidity into the banking system (when the Fed buys Treasuries and mortgage-backed securities, they are putting cash into the system).

As a result of all of these actions, we’ve seen bond market pricing begin to normalize and credit markets working for issuers again.

Central Banks around the world are taking similar actions.  The global reduction in interest rates and inclusion of more bond purchases are meant to aid the banking system during this global economic stoppage. The improvement in bond market functioning suggests that these steps are having the desired effect.

Global Monetary & Fiscal Stimulus to Fight COVID-19 Impact

February - March 2020

  Central Bank Liquidity Injection Government Fiscal Stimulus Central Bank Liquidity Injection & Government Fiscal Stimulus
  $ Bln % GDP $ Bln % GDP $ Bln % GDP
U.S. $1,500 7.0% $2,756 12.9% $4,256 19.8%
Eurozone $1,100 8.3% $480 3.6% $1,580 11.9%
Japan $126 2.4% $184 3.6% $184 3.6%
U.K. $387 14.1% $38 1.4% $425 15.5%
China $1,153 8.0% $111 0.8% $1,264 8.9%
Others* $406 - $1,416 - $1,948 -
Total $4,672 5.4% $4,984 5.8% $9,655 11.1%

*incl RoW and ADS, IMF, WS Source: Cornerstone Macro

Fiscal Policy

The Federal Government also has risen to the occasion, recently passing the largest stimulus package ever. The Coronavirus Aid Relief and Economic Security Act (CARES Act) is worth over $2 trillion and breaks down as follows:

This is the third stimulus package passed by the Federal Government and by far the largest, with increases in unemployment funding, small business lending, payroll protection, health care funding, and support for large corporations most affected by the economic stoppage. The three packages passed so far total almost $2.8 trillion.

Of course, passing these packages and getting them implemented are two different things.  With millions filing for unemployment and millions of businesses interested in the lending programs, it will take weeks to get the money distributed. Clearly many of the service businesses affected will not recover lost sales. That’s partly why we are seeing projections of a decline in economic activity for the second quarter on the order of 30 to 40%!

When taken together, the fiscal and monetary stimulus in the United States is equal to 20% of our annual GDP or almost one calendar quarter’s worth of economic activity.  While this will help, the pace of the recovery will depend upon the speed at which the growth rate of infections declines and the pace at which businesses are allowed to return to normal.

In the meantime, we can use the data to measure the negative effects of the shutdown and the quantity of stimulus offered to determine how it might affect asset values. 

We hope you are healthy and safe, and we continue to be here to discuss your concerns. Thank you.

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by Brian Andrew

As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy to provide consistent, actionable investment solutions for our clients.

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