Market Update March 2020 image

Market Update: The Fed Takes Extreme Action

Published: March 24, 2020

We hope that everyone is staying safe and healthy. We understand that this may be a period of stress and anxiety for you and your loved ones; please be assured that we are here as always to help you navigate your way. We will keep you updated as quickly as possible regarding what is happening in the markets, our perspectives and actions that we are taking in response. Please do not hesitate to reach out with any questions or concerns you may have.

The Fed Goes Big
Following the continued volatility of the markets and the essential shutdown of our economy, the Fed announced that it will buy an unlimited amount of securities to support the financial markets, including U.S. Treasuries and mortgage-backed securities. It has also extended this—atypically—to corporate and municipal securities. These purchases are expected to exceed well beyond one and a half trillion dollars. It is anticipated that this action by the Fed will play a major role in helping to stabilize the financial markets. As a result, financing and liquidity will be more accessible to consumers, businesses and municipal governments and agencies.

Stimulus Bill in the Works
In addition, although the latest stimulus bill is still being debated in Congress, we anticipate that a version will pass. It is essential to ensure that the country’s employees still receive paychecks or replacement funds during this difficult time. Over half of the country’s large corporations have stated their intent to continue to provide paychecks to their employees even if ordered to work from home or if they are laid off as a result of some states’ shelter-in-place policies. It is expected that the stimulus bill will reimburse businesses, both large and small, for maintaining paychecks to their employees.

Unpredictable Growth Projections Ahead
Given the current situation, it is unclear what lies ahead for GDP or corporate earnings. We do believe that the underlying structure of our economy is sound, and we are heartened by the resiliency of the American people in the face of the current crisis. Healthcare, public safety and other professionals, including those manning grocery stores, pharmacies and other essential services, are stepping up in this time of need. Large corporations and small businesses are providing needed supplies and facilities to aid local governments in their efforts. We at Klingenstein Fields Advisors (KF Advisors) are also committed to doing our part to help the community in any way possible.

Health Care Companies Step Up Efforts
In the effort to combat the virus and reduce the impact of its spread, pharmaceutical companies and the many research scientists supported by the National Institutes of Health are suggesting therapeutic remedies or possible solutions based on their current research and in some cases are redirecting their research to meet the current crisis. Some potential vaccines are already in testing, although discipline and process are still being carefully followed.

Hunkering Down
In China, the first case was detected in late 2019. Three months later, following strictly implemented protocols, the Chinese workforce has mostly returned to work, with the world watching carefully how this return to normality progresses. Based on this, we believe that the government and financial institutions must be prepared to support businesses and their employees for a minimum of three months.

Cost of Support
The total cost of the stimulus programs could reach $5 trillion dollars before year end. In comparison, the total GDP of the United States is currently about $22 trillion, and our national debt is currently about $23.5 trillion. The concern in adding $5 trillion of debt is that it could lead to inflation and higher interest rates. However, ten years of global government stimulus and spending—including here at home—has not had that result, even despite efforts of governments to raise inflation and rates.

Maintaining Conviction
We believe that the underlying foundation of the U.S. economy remains solid and that the stimulus programs being contemplated are both necessary and will succeed. Our focus remains on owning high-quality investments in order to provide strong long-term growth. 
While these decisions will take time to enter the market and prove themselves out through an improving investor outlook, we are encouraged that the Fed has chosen to act. As always, we are here to serve and answer any questions you may have about your portfolio or current market activity. 

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.