U.S. Congress’ turn to go all-in

Earlier this morning, reports suggested the White House and United States Senate had reached an agreement on a massive $2 trillion stimulus package. Equivalent to roughly 9% of U.S. GDP (gross domestic product), this would be one of the largest rescue packages in the country’s history.

We would, of course, caution that we do not yet have visibility on the exact text of the bill nor do we have the Senate votes or House votes locking the bill into law at this time—but financial markets are forward-looking, and the details coming out of Washington, D.C., do look encouraging. What we’ve been able to slice together from various news agencies suggests the $2 trillion package is likely to contain the following elements:

  • Roughly $500 billion allocated to send checks directly to U.S. households. For example, a married couple below certain income thresholds would receive $2,400, with an additional $500 per child under the age of 17.

  • Roughly $350 billion in cash flow assistance for small businesses in the form of federal loan guarantees. The provisions of this line item seem to suggest that if the small business receiving funds keeps its workers employed for the duration of this crisis, the loan will be forgiven. On the surface, this looks like a creative way to align incentives with economic relief.

  • Another $500 billion for a bailout fund, the bulk of which would provide equity capital that the U.S. Federal Reserve (the Fed) could in turn lever up to $4 trillion in support for loans to “broad groups of distressed businesses”.

    Without the full details of the text, we do not know exactly what this will look like yet. But as we wrote about previously, it may be related to the Main Street Business Lending Program that the Fed teased as part of its policy announcements on March 23. Again, we don’t know the details of that program either. However, it could, for example, consist of the Fed taking on a substantial amount of the credit risk from bank loans to small businesses to support the flow of liquidity to the parts of the economy that really need it right now. $4 trillion is A LOT of money and this appears to be a very significant potential backstop to the unfolding crisis.

  • $150 billion for state and local governments

  • $100 billion for hospitals

  • Other odds and ends

Building blocks for eventual recovery appear to be falling into place

Markets seem to like what they’ve see so far in the last two sessions. The S&P 500® Index and the MSCI All Country World Index are both up roughly 13% from Monday’s close. To be clear, we are not out of the woods by any means yet. Risk markets are still down significantly from mid-February. But two out of the three necessary conditions for a rebound appear to be falling into place here:

  1. Massive monetary stimulus from the U.S. Federal Reserve and globally
  2. Massive fiscal stimulus from the U.S. Treasury and globally

The third and final piece of the puzzle for investors to rebuild confidence in the outlook will likely be on the medical side—in the form of evidence that the number of new daily coronavirus cases in North America and Europe has peaked. We aren’t there yet and this piece is almost impossible to forecast. Heightened volatility will almost certainly remain in the market regardless, but the building blocks for an eventual recovery are falling into place here. We are encouraged by that when thinking about the longer-term outlook for risk markets.

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