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Market Commentary: Relief Package Enacted as Unemployment Sharply Rises

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Markets look forward and, at least for a week, saw signs government is willing to provide support to get the economy through the coronavirus pandemic. The centerpiece of the steps announced last week was a $2 trillion package designed to keep people employed and support those who have lost their jobs.

Key Points for the Week

  • More than 3 million workers filed a new claim for unemployment benefits as businesses reduced salary costs.
  • Congress and President Trump enacted a $2 trillion package designed to support companies and workers, while positioning the economy for a quicker rebound.
  • Stocks welcomed the larger aid package as the S&P 500 rallied more than 10% last week.

A mixture of grants, deferments, and loans was approved by Congress and signed by the president on Friday. The spending measure, as summarized in the accompanying chart, is sometimes referred to as a stimulus but is better understood as a package designed to sustain the economy as policies enacted to slow the coronavirus severely curb economic activity. Initial unemployment claims spiked to 3.3 million as workers laid off or furloughed reached out for support.

The sense that the government put forth a package with enough zeroes pushed markets higher. The S&P 500 rose 10.3% last week as the size and approval of the support package became more certain. Global stocks roared higher as the MSCI ACWI gained 10%. Even with the rally, the S&P 500 remains almost 25% below its all-time high. Both equity indexes are just short of 30% below all-time highs reached last month. Concerns about market liquidity reduced bond prices. The Bloomberg BarCap Aggregate Bond Index gained 2.7% as efforts to improve bond market liquidity supported bond prices.

Economic data current with the existing social distancing efforts remains elusive. New unemployment claims, COVID-19 case counts, and discussions of additional support packages will remain central to the market discussion. The monthly employment report, which has been a key number for investors, will be of less value as the data it uses will be three weeks old. Instead, weekly initial unemployment claims will remain a key focus. Also, economic data out of China and South Korea will provide some indications of how well the global economy may bounce back in the future.

Relief Rally

Investors weighed the awe-inspiring size of the government stimulus against the shock of 3.3 million people filing new applications for unemployment. They chose awe. After a decline of nearly 3% on Monday, markets roared more than 9% higher Tuesday and added on additional gains Wednesday and Thursday before falling more than 3% on Friday. The net effect was a 10% gain in the S&P 500.

Unlike previous packages, which failed to staunch market losses, investors reasoned the government finally approved one large enough. Much of the bill involves the government providing direct support to those affected. The support package includes more than $300 billion paid directly to households, an additional $250 billion for unemployment, and delays in tax payments. Loans are being provided to businesses in order to keep employees on the payroll. Many of these loans will be forgiven if companies retain employees through the pandemic-caused slowdown. It includes support of travel-related industries that have been hard hit by the decline in travel.

One part of the package involves the Treasury allocating $454 billion to the Federal Reserve to absorb losses on loans the Fed makes to businesses. The Fed is expected to leverage this amount by 5-8 times, providing loans of $2 trillion to $3 trillion to support business. Counting the full value of those loans, the government is supporting the rest of the economy with more than $4 trillion in aid.

The relief package and the rally it helped cause raise additional questions for investors. Was Monday the bottom or just a reprieve in a market poised to head lower? History provides mixed evidence. First, sharp rallies often occur during difficult markets. When the technology-led market of 1999 reached its peak early in 2000, a long decline ensued, with the S&P 500 finally bottoming on October 9, 2002. In between, the S&P 500 rallied twice by more than 20% and a third time by more than 17%. Each time, the rally faded and the market reached new lows.

But those rallies and subsequent declines were affected by the fundamentals. A downturn that started with technology was extended by the terrorist attacks of 9/11 and the ramifications of the Enron bankruptcy. Even when the market bottomed, it staged a very large comeback and then headed sharply lower before roaring higher again.

Picking tops and bottoms is a fool’s errand. It is hard enough to understand the fundamentals, but picking a bottom requires the investor to also gauge how other investors will react to new information and when enough of them will have sold that the market can rally higher.

While rallies like last week’s don’t reliably call market bottoms, they can be counted on to produce regret. Some investors are berating themselves for failing to have their advisor invest the cash they had been holding onto for the perfect moment. Others are regretting pulling back their risk on Monday afternoon.

Give yourself some grace. No one gets it perfect. The important part isn’t getting it right every time, but making sure you stick to a plan for long-term success. If you stayed on course, congratulations! It isn’t easy. If you’ve gotten off your plan or feel like you were close, reach out to your advisor and talk it through.

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