Stimulus Package and the Fed's Bazooka
Updated: Jul 3, 2020
This week the markets recovered slightly. Not enough for my portfolio to reach breakeven, but it was still a relief. Part of the recovery was driven by the US Government greenlighting a USD 2.2 trillion stimulus package. Only time will tell if this will work.
What’s in the stimulus package and what does it mean?
In a rare display of bipartisanship, the House and Senate unanimously passed the much-awaited stimulus package. The package comprised of direct support to individuals in the form of cash as well as loan and cash benefits to businesses. While the package is no doubt good for the American economy in the short term, if the C-19 situation does not improve, the government will have to rethink its strategy.
One of the biggest winners of the package were the American citizens. Individuals who qualify will receive checks from the government, with the unemployed receiving a greater sum. This should provide support to the people who are affected by the shutdown as they will be able to continue spending which essentially drives the economy.
Airlines also got some respite in the form of grants. The package has been careful to include conditions on these grants so that they benefit the employees directly as share buybacks and executive compensations have been limited in the conditions. The retail sector also got some tax relief as they have been badly hit by the shutdown.
On the other hand, industries like cruises, oil and gas and insurers were completely left out of the package. Some of these sectors could be considered in the next stage of benefits should they be given out, but the current outlook appears bleak.
The stimulus package has appeared to lift the economy slightly. The same cannot be said about the measures that the Federal Reserve has taken. At the beginning of March, the Fed cut its interest rates to 0 without it having much effect on the economy. Due to this failure, they also announced Unlimited Quantitative Easing last week. Unlimited QE basically means that the central bank will be purchasing as much assets as required to support the economy and the stock market. This could include buying up bonds, securities and stocks and basically at an unlimited level. When the central bank performs this action of buying up assets, it is actually done with the intention of introducing more liquidity (or cash) in the market. Therefore a very simple analogy to understand QE is that basically the Federal reserve is printing more money, and they want to do this without any limits. To me this just appears as a very desperate move because nothing is working for them.
The Fed has also announced that they have more “Bazookas” in their arsenal. Yahoo! Finance has a great article about all the tools that are available to the Fed and the implication of using these tools.
The fact that the Fed are so desperate does not give me any confidence at all. Therefore, I am sceptical of the long term effects of their policies. I think the boost from the stimulus package will be short lived and I will not be too excited to jump back into the market right now.
Now coming back to my portfolio, there is little to discuss on it. I have not made any moves in the market last week. The markets did rise on the news of a stimulus package and Trump promising that the C-19 will be gone by Easter. That effect is clearly seen on my portfolio. I would not get too excited about it because in reality the uplift in mood is based on temporary indicators. I still think the C-19 is not done yet and the economy will take more time to recover. Therefore, I still wait….
Disclaimer: This post should not be interpreted as investment advice as I am not a professional financial consultant. The objective of this blog is to share my experiences with others and receive feedback. I will provide links to my information sources to the best of my abilities, but the reader is responsible for their own due diligence