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The Federal Reserve offers additional stimulus – The Fed cut rates by a full 1% over the weekend, returning its policy rate back near zero where it last was during and after the financial crisis. In addition, it will restart its bond-buying program (quantitative easing) to inject $700 billion of new stimulus alongside new measures to make it easier and cheaper for banks to access funding directly from the central bank.
The Fed is only part of the equation – This situation has evolved quickly, and we give the Fed credit for acting swiftly and proactively to provide financial support to the economy. However, unlike the financial crisis and other traditional economic slowdowns, Fed stimulus won't be the primary cure. In our view, the Fed's response is necessary to maintain a well-functioning financial system and ensure banks have liquidity and businesses have access to the credit they'll need to weather this storm. So while this new monetary policy stimulus is a necessary piece of the puzzle, we view it as a requisite complement to the fiscal policy (government support through tax adjustments, spending programs and financial aid) that will be required to bridge the gap for consumers and businesses until the containment and social-distancing impacts fade.
Volatility likely to persist, but policy actions help pave an eventual rebound – We'd attribute Monday's sharp decline to the combination of:
Fed policy is back at financial-crisis settings, but it should not be lost that this is not the financial crisis, it is a health crisis. That is of little consolation to the market for now, as the impact of "social distancing" on consumption and investment is likely to shock the economy into a temporary but notable recession. Extraordinary monetary and fiscal policy are necessary, but at the end of the day, it will be the medical progress that will dictate the timeline for a reduction in market volatility and the ultimate rebound in stocks. We expect daily volatility to persist until new virus cases begin to curtail, but we think investors should find optimism in the fact that:
Sources: S&P 500 Index; international stocks – MSCI EAFE Index; U.S. bonds – Bloomberg Barclays U.S. Agg; 10-year rate – U.S. 10-year Treasuries. Market Stats: price return for S&P 500 Index and MSCI ACWI-ex. US.
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