COVID-19 and Markets – Part 3

Published: March 17, 2020

The effects of Coronavirus (COVID-19) continue to be felt in the U.S. and around the world. In a clear sign that the Federal Reserve (the Fed) is willing to do whatever it takes to help mitigate the negative impact of COVID-19, it lowered the Fed Funds rate to 0% – 0.25% and announced additional quantitative easing measures of $700 billion in U.S. Treasury and mortgage-backed purchases. It also reduced bank reserve and capital requirements, with the goal of freeing up more funds for the banks to lend. And, the Fed lowered the interest that it pays banks for money held at the Fed to incent them to lend to private companies. Finally, the Fed has pledged to provide unlimited funds to keep the U.S. financial markets operating properly and will help provide dollar liquidity to major foreign central banks. 

The Administration is also implementing measures to help businesses, state and local governments by letting them use payroll tax reserves for wages, it has increased Medicaid payments to states and has many other potential measures under consideration. We anticipate legislation to aid transit authorities and other municipal agencies to fill a shortfall of tax, toll and other revenues. In addition, Congress and the Administration have stated their intent to aid small businesses with programs to help retain employees during the downturn. Our expectation is that these measures will continue, possibly necessitating an additional trillion dollars in Federal assistance during this trying time. 

Market reaction to the Fed’s moves and the continued impact globally of COVID-19 on the economic, fiscal and social environment, was strongly negative. The U.S. equity markets dropped precipitously soon after they opened, triggering a fifteen-minute trading halt, and they have now declined approximately 30% from their peaks, putting them firmly in bear market territory. 

As we reiterated in our previous communications, our commitment to you continues, and we are operating at full speed, closely tracking and responding appropriately to events. It is likely that the markets will continue to be highly volatile, with additional potential selling, as the world grapples with bringing COVID-19 under control. This will be done, but at a cost. We believe that the measures the government is taking will begin to have a positive impact; especially since the Fed and the government have shown commitment to taking whatever steps they deem necessary to support the economy and the markets. While a vaccine is still some time away, we are encouraged by the intensity and speed of development. Scientists at the Kaiser Permanente Washington Research Institute, in fact, began a first-stage study with human volunteers of an experimental vaccine on March 15, which is a record time to reach the testing phase. Many other vaccine development efforts are also occurring. Alongside that, researchers have also been working furiously on treatment to improve the outcomes of those who have contracted the virus.

Important Disclosures

This material is provided for informational or educational purposes only and should not be construed as investment, accounting, tax or legal advice. Always consult a financial, tax and/or legal professional regarding your specific situation. This communication is not intended as a recommendation or as investment advice of any kind. It is not provided in a fiduciary capacity and may not be relied upon for or in connection with the making of investment decisions. Nothing herein constitutes or should be construed as an offering of advisory services or an offer to sell or a solicitation to buy any securities or a recommendation to invest in any specific investment strategy. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future returns. The views expressed herein are as of a particular point in time and are subject to change without notice. The information and opinions presented herein are general in nature and have been obtained from, or are based on, sources believed by Klingenstein Fields Advisors (“KF Advisors’) to be reliable, but KF Advisors makes no representation as to their accuracy or completeness. Although the information provided is carefully reviewed, KF Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided. KF Advisors represents two investment advisers registered with the Securities and Exchange Commission: Klingenstein, Fields & Co., L.P. and KF Group, LP. If you are a KF Advisors client, please remember that it remains your responsibility to advise KF Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.