On Tuesday in Forecasts & Trends, I summarized the unprecedented actions the federal government has taken thus far to counter the coronavirus crisis. Today, let’s look at the historic (and yes, scary) measures the Federal Reserve has taken to fight the virus pandemic.
There are numerous actions the Fed has taken in recent weeks, including slashing its benchmark Fed Funds rate to zero (0.00% to 0.25%) in an emergency meeting on Sunday, March 15. Since then, the Fed has announced several other bold measures in an effort to stabilize the financial markets, which I will discuss below.
But by far the most dramatic action the Fed took was to announce earlier this week that it would buy unlimited amounts of US Treasury securities to increase liquidity in the financial markets. The Fed has never done this before, and the historic move signals that the central bank is sincerely worried the coronavirus crisis could lead to a severe recession or worse.
Here is a summary of the actions the Fed has taken so far in reaction to the coronavirus:
- Expanded the new round of quantitative easing (QE) asset purchases from $700 billion ($500 billion for US Treasury bonds and $200 billion for mortgage-backed securities) to an unlimited dollar amount, running indefinitely
- Created a new facility to purchase investment-grade corporate bonds and investment-grade corporate bond ETFs
- Tweaked bank capital rules so that banks will not be penalized and forced to constrain lending if their capital ratios fall below the regulatory minimum
- Announced unspecified “new programs” to directly finance “employers, consumers and businesses” with over $350 billion, with the Treasury kicking in $30 billion
- Created the “Primary Market Corporate Credit Facility” to buy bonds and lend directly to large investment-grade companies
- Revived a 2008-era program called the “Term Asset-Backed Securities Loan Facility,” which will enable and fund the securitization of student, auto, credit card and Small Business Administration loans
Expanded some money market fund and commercial paper liquidity programs to include the purchase of municipal debt.
By far the most expansive measure outlined above is the Fed’s decision to allow its purchases of Treasury securities to an “unlimited dollar amount.” Again, this has never happened before.
Media headlines have largely applauded the Fed’s latest emergency actions, praising the central bank’s flexibility, creativity and decisiveness. There is a lot of talk about the Fed clearly doing “whatever it takes” to get the country through this very tough time.
But what does whatever it takes mean? Obviously, no one knows. Some Fed-watchers believe the central bank is prepared to buy up to $4 trillion in additional Treasury securities just ahead. Yikes! I don’t know if such a gargantuan figure is accurate, but if it is, that’s truly scary.
Think about it. The government is about to pass a historic stimulus bill to borrow over $2 trillion just ahead. And if the Fed is willing to buy another $4 trillion or more of Treasuries to calm the financial markets, that means we will in effect be adding another $6 trillion of stimulus to the economy. Again, this has never happened before! It remains to be seen if it will work.
The bottom line is the coronavirus crisis is driving this country toward a financial crisis and a possible debt depression. Unprecedented business shutdowns have already led to a massive spike in unemployment which will continue over at least the next couple of months. Some respected forecasters are predicting a 2Q plunge in GDP of 20% or more. If so, that’s more than a recession!
I’m not saying that is what is going to happen. But I’m also not saying it won’t. The fact is, no one knows what will happen just ahead. So, the question is, what should investors do now?
With stocks down over 30% at the low earlier this week, I do not recommend that you sell at this point. While no one knows if we’ve seen the worst of this downturn, I do not believe it is time to abandon equities.
What I do strongly recommend is that you consider allocating money to our alternative investment programs that do NOT invest in stocks and equity funds. That includes Wellesley Asset Management that invests exclusively in convertible bonds, and JLL Income Property Trust which invests in commercial real estate.
If you are an “accredited investor,” we have several other very successful offerings including a private residential mortgage fund and a very interesting “longevity” fund that has nothing to do with stocks. If you prefer to diversify away from equities, we can certainly help you do so.
While I don’t recommend abandoning equities at this point, I always recommend diversifying your portfolio with investments that are not highly correlated with stocks. Call us at 800-348-3601 and speak with one of our non-commissioned, no pressure Investment Consultants.
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