I would love to give you a clear idea of what to expect over the next few months, but the only reliable thing I can tell you is that we are in uncharted territory. Given everything, the market overall is doing well. We started off the week well, with stocks rising based on news of a potential treatment for coronavirus, and the anticipated openings in several states. On Wednesday of last week, we were actually positive on a year over year basis. Thursday and Friday the market declined, as corporations reported earnings.
Another factor that has helped to stabilize the markets are actions taken by the Fed. Way back on November 4th, we explained in this podcast what the Fed, or Federal Reserve Bank is, and what they do. The Fed is America’s central bank. Many scholars say their actions made the Great Depression worse.
The 2008-09 Financial Crisis opened the Fed to new courses of action. Among those, instead of just raising or lowering interest rates, the Fed purchased large quantities of government bonds, what was known as “quantitative easing”. They provided liquidity, or ready cash, to the market. Buying those bonds increased prices – or kept them from falling too much. When bond prices increase, their yield, or income received by the investor, declines. This results in investors putting their money somewhere else, like equities, or stocks.
In our current crisis, the Fed acted quickly and decisively. They lowered interest rates. And they reduced the amount of money banks had to keep in reserve, which meant banks had more money to lend, again to increase the monetary supply and overall liquidity.
The Fed began buying government bonds again, and they are also buying corporate and municipal bonds. Last week the Fed expanded its criteria to include cities with a population of at least 250,000, or counties with a population of 500,000. While they haven’t started buying those bonds yet, merely the announcement that they would provided a calming effect on the market.
Further, banks typically borrow from each other to meet their reserve levels each evening (as each night, various banks have more or less money on hand). The Fed is considered the “lender of last resort.” In March, the Fed instead encouraged banks to borrow directly from the Fed. They also re-established emergency credit facilities for the Fed to purchase commercial paper, short term notes used by many corporations to manage cash flow.
Overall, central banks around the world have used every tool they have to keep economies flowing, and to lessen both the severity and duration of the current recession. Some of these actions may lead to inflation down the road. But that’s a problem for another day.
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Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.
And if you don’t have a financial advisor, or you haven’t heard from yours, come talk to us. This is Ann Alsina with CovingtonAlsina.