This week was relatively busy in terms of incremental developments associated with COVID-19. The financial markets were choppy, but ended the week essentially flat. The S&P 500 finished the week down 0.21%, while the technology-focused Nasdaq fell 0.34%. The small cap Russell 2000 rose 2.23% and international stocks, as represented by the MSCI ACWI Ex-USA, was basically flat, rising 0.08%. The Barclary’s U.S. Aggregate Bond Index ended the week up by 0.04%.
For the month of April, financial markets rose sharply, with the S&P 500 advancing by approximately 13%, the best month on record since 1987. Markets were boosted by monetary and fiscal policy action along with a flattening coronavirus curve, which has prompted many states to take steps toward a gradual lifting of lockdowns. Although Q1 U.S. GDP came in at a -4.8% quarter-over-quarter annualized rate, stock prices were not affected, which suggests, as we have said in the past, that financial markets are forward-looking and focused beyond the almost certainly steeper decline that will be reported in July for Q2.
Three of the most significant developments this week were (1) news of positive trial results for remdesivir, Gilead’s coronavirus treatment, (2) the U.S. corporate earnings reports, and (3) heightened U.S. / China tensions. The first two had a positive effect on the markets. The third, however, introduced some additional uncertainty.
Preliminary results from the study performed by the National Institute of Allergy and Infectious Diseases’ (NIAID) on using remdesivir to treat COVID-19 were positive. Although the full trial results have not yet been published, early indications suggest that remdesivir shortens the average hospital visit for patients and may decrease mortality rates, which Dr. Anthony Fauci touted as “quite good news.”
Corporate earnings were mixed, but encouraging overall, with companies such as Facebook and Google reporting resilience. Another positive sign was that many companies reported better activity in the second half of April compared to the first half when lockdowns were in full force nationwide.
During the back half of the week, tensions between the U.S. and China rose after U.S. President Trump mentioned that he is considering imposing tariffs on imported goods from China. His comment stoked worries that there might be a resumption of conflict in economic and trade policy between the world’s two superpowers.
Global central banks reasserted their support for economies adversely affected by the government-imposed cessation of business and social activity during the COVID-19 pandemic. Both the European Central Bank (ECB) and the Federal Reserve expanded certain of their stimulus programs. Because monetary policy measures can be implemented more speedily in many cases than fiscal policy enacted by legislatures, and because this can have a significant influence on investor confidence, we think it worthwhile to focus on two of this week’s monetary policy developments.
On Thursday, the ECB kept its key benchmark interest rate on hold, but importantly it expanded its lending facilities to banks by offering them 4-year loans at the cheapest rate on record: -1%. In language echoing Fed Chairman Powell’s remarks in March, ECB President Christine Lagarde offered “whatever it takes” support via its Pandemic Emergency Purchase Program, saying that the ECB will engage in bond-buying “by as much as necessary and for as long as needed” to respond to the economic contraction. Both measures — the expansion of the program and the new, inexpensive loans to banks — are intended to provide all necessary liquidity to credit markets and improve the ability of banks to supply loans to businesses and individuals who may need a bridge from recession to recovery. The actions, therefore, strengthen the generally solid positions that banks already held entering the pandemic. They also supply necessary support for weaker countries such as Italy and Spain.
Similar to what it did earlier in the week with its policy support for municipal bonds, on Thursday, the Federal Reserve announced that it is expanding the scope of and eligibility requirements for its Main Street Lending Program. (It is, in our view, no coincidence that both the ECB and the Fed announced an expansion of stimulus measures on the same day; it reflects deliberate coordination.) It will now allow businesses with up to 15,000 workers and revenue up to $5 billion to apply (both up from the previous limit of 10,000 workers and revenue of $2.5 billion). The program is designed, in the Fed’s own words, “to help credit flow to small and medium-sized businesses that were in sound financial condition before the pandemic.” Qualifying businesses may request loans of up to 4 years from banks at interest rates that are below prevailing market levels. Although these loans are not forgivable and must be repaid, a borrower may defer interest payments for up to a year. The changes that the Fed announced Thursday also create a new, third type of loan, the details of which are a bit involved, but the effect of which is simple enough: more businesses (borrowers) will have accessibility to the loan program that is being funded with $75 billion through the CARES Act.
Looking ahead, we believe that the massive coordinated government policy response by both Congress and the Fed, which is still in the process of being implemented, will have positive economic effects. The likely upshot for investors is that many companies will have greater liquidity and financial resources to withstand the economic recession and to emerge poised for future success. Near-term, it may help to prevent some credit downgrades or even defaults, which, if they occurred, would likely negatively affect the high yield bond market and stock prices. The Fed’s expansion of the program, in other words, may help to lift investor confidence in the financial strength of individual companies as investors look ahead to the economic recovery.
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