After the traditionally infuriating song and dance, early on Wednesday morning Congress agreed to a $2 trillion fiscal stimulus package (+4$ trillion in Fed buying power) that is so full of pork that there is no way it would not have passed. However, agreement on the bill was - as surprising as it sounds - the easy part, and now the discussion shifts to just how this biggest ever fiscal stimulus in US history will be implemented, and alongside that it also shifts from "when will stocks bottom?’ to "has the floor finally been established?"
As BMO's Ian Lyngen writes, the price action of the last three trading sessions led to this change in discourse, as did several key policy developments.
- First, the Fed has continued its aggressive campaign to insulate the US economy from the worse of the outbreak.
- Second, a dizzying array of emergency measures have been deployed to combat Covid-19 itself.
- Third, Congress finally "agreed" (as if it would ever turn down) on a $2 trillion package stimulus package (full vote later today) which includes $500bn to be used to back loans/assistance for firms and $350 bn for small businesses – as well as direct payments to households of $1,200 per individual and $500 per child. Included in the bill will also be enhancements to the unemployment benefit as well as support for the domestic airline industry.
So now, we wait?
Well, not exactly. AS the BMO rates analyst writes, assuming Washington is able to translate the agreement into law in an expeditious manner, the next hurdle will be as great (if not greater) than the first and presents a significant degree of execution risk. There are several aspects of the proposed stimulus measures which have well-established distribution channels; unemployment benefits and the injection of cash directly to households. As for the corporate, small business, and state/local government allocations, this leg of the process presents a greater challenge.
Ensuring as many firms as possible remain operating in the wake of the outbreak is vital to preserving as much of the previously robust employment market as possible. To this end, a timely dispersal of funds with an emphasis on grants over loans will be the most effective way to deliver the objectives of the $2 trillion endeavor. As details on the rollout come into focus, investors will remain wary of bottlenecks which would detract from the economic upside.
Some of the Fed’s new monetary policy tools are facing a similar set of execution risks – namely the purchase of multi-family agency CMBS, new investment grade bonds, and existing corporate debt. We reported last night that the Fed has tapped Blackrock to manage these efforts – a very similar decision to that which was made during the last financial crisis. The move also elevates a large degree of the uncertainty about ‘how’ the new programs will be implemented; although clarity on their timing remains an important unknown as investors await the opportunity to witness the renewed central banking largess in action.
It’s notable, if intuitive, that the drivers of financial markets have shifted to domestic actions as opposed to those seen in Asia and Europe. The experience of nations from China to Italy have provided investors with some sense of what to expect in terms of timing and severity. As tragic a hit to the global population as Covid-19 is, the impact on other regions meaningfully informs investors’ expectations of the impact on the US. But, as Lyngen notes, this isn’t to imply that the case/fatality count is close to reaching an apex domestically; in fact, health officials have identified this week (and potentially next) as perhaps the most dire for incoming reports. Rather, the information and responsiveness of federal, state, and local government officials combined with glimpses of clarity on the length of the economic lockdown, have begun to alter the sentiment surrounding the outbreak – at least from the perspective of the market. Predictions about how draconian the US shutdown will become have been replaced by prognostications on what a post-coronavirus world will entail.