Perspective
People are asking us to put into perspective the $2 trillion financial aid package that was passed by Congress last week. We will be putting out a detailed video on this topic later in the week but will go over a few things now. For starters, the U.S. economy generates $22 trillion of GDP annually. This financial aid package has by far exceeded any other financial aid package in history and we don’t think it’s over yet. Over the weekend, the president announced that the social distancing precautions were extended to April 30th, 2020. With that announcement, this might not be the last time Congress has to throw money at the COVID-19 economic problem. We have had clients asking about the short rally that we saw in the market last week. People are wanting to know since the market rallied if the pain is over and if we have seen the bottom yet. It is impossible to find the bottom, especially when there’s no historical relevance for an event like this where a virus basically has shut down the economy for up to two months. Another thing to keep in mind is that it only took 19 days for the market to fall 30% which is historical. Looking back, it took 57 days for the market to fall that much back in 1987. It took 348 days in 2008 and in 2001 it took 363 days to fall 30%. Also, remember that every bear market has rallies within it before falling again. The 2008 bear market had two rallies of more than 18%, like the one we saw last week before it continued to fall further. In 2001 around the dot com bust, there were three rallies of more than 18% before it fell further. Looking at it from a historical standpoint, the pain might not be over, but it was good to see the market show a little bit of life last week.
Market Rally
We saw a rally in the markets last week at the news of the Coronavirus stimulus bill being passed. However, something we’re watching closely is the tightening of credit spreads, which is very good news. A credit spread reflects the interest rates charged on high yield in corporate debt compared to U.S. Treasury debt. It’s a reflection of how risky people think corporate bonds are relative to government bonds and we saw that interest rate differential drop last week. That alone is good and very impactful on the economy because there’s a lot of corporations that will likely need to borrow money. The credit spread is the cost of them borrowing money. We saw the spread tighten and the interest rates on corporate bonds come down. Which would reduce, potentially, how long this negatively impacts corporate America. The reason we’re watching that closely is that the Federal Reserve came in and acted before Congress was able to pass the stimulus bill. The stimulus bill that was passed over the weekend will impact America for weeks and months to come. We’re not seeing any immediate impact today while the Fed is hitting markets so it may be a precursor to where we can see some canaries in the coal mine, and this market event start getting a little better. We’re watching the corporate bond market very, very closely. It’s not going to just be the stimulus package to make improvements. There’s a lot of pieces of the puzzle as everybody starts to move forward. We’re now starting to get to the crossroads of the economics versus the disease. We think we’ll see a lot of those things start to have an impact in the coming weeks. You don’t have to get back to the pre-crisis level to see improvement and that’s what we’re watching.
Liquidity
The main thing the Fed did last week is, they kept us liquid in markets. Having liquidity in markets is like having oil in the engine of your car, you must have that to make it run. The Fed calmed markets a lot by hitting the market with a lot of liquidity. The thing we really want you to focus on is that for 4-5 years on this vlog we’ve talked about the danger of deflation and what a difficult cycle that is to get out of economically. The Federal Reserve putting that much liquidity in the market really cut deflation off and kept it from starting. For example, if John Smith has stocks or bonds in the market and you are trying to buy it, you must have the liquidity to do that. If John Smith doesn’t see that you have the liquidity, he’s going to panic a little bit on price. If liquidity is there, it works normally, and he can sell it at a price that I want to buy it. Cutting that deflationary cycle off really was a big, big thing for the Fed. We’re looking at as much research as we can to see what we need to look at and make sure we’re not blindsided as we go through the volatility and changes that are occurring in our economy and our markets. We want to keep you updated as well.
Our Plan
We have a business continuity plan and it’s our fiduciary responsibility to be able to operate normally for our clients. This continuity plan was not put in place due to the current pandemic. We’ve had this around since the beginning when we started Fi Plan Partners. You can contact anybody on our team at any time. If you go to our website, you can find everyone, whether it be the financial planning department, the business consulting department, portfolio strategies, or operations. We give a lot of economic data along with technical analysis through our vlogs and research but it’s also important for our clients and individuals to know that they can contact us over the phone or through email at any time. We have certain shareware that we can use, such as zoom, and other smart technology to keep in touch and up to date. We will continue to strive to provide nothing but the best during these times.
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