What’s Driving Equity Markets
Fiscal response has been impressive and is a primary reason why markets have seen such a sharp rebound from their mid-March lows. In a note that came out last Sunday Goldman Sachs’ economic team wrote that “disposable personal income is likely to register slightly positive growth for the year” attributed to the stimulus payment program rolled out by the government has been so robust. This prediction is predicated on the passage of ‘Phase 4’ of the government's response so not a done deal yet. We think this forecast for disposable income to actually grow in 2020 is on the optimistic side but the fact that the government has seemingly been able to buoy consumer spending is one of the reasons for the sharp bounce back in markets in the last month.
On the monetary side, the Federal Reserve has stepped into the credit markets to prevent a run on the corporate sector. A typical characteristic of recessions is that liquidity dries up in the credit markets, companies are not able to refinance maturing debt and thus must file for bankruptcy. By purchasing investment grade corporate bonds, the Federal Reserve has essentially backstopped a large chunk of S&P 500 companies from a liquidity crisis which has not been the case in past recessions. All bankruptcies have not been avoided, but as long as companies can get financing through one of the new credit facilities set up by the Federal Reserve hopefully bankruptcies will continue to be largely avoided by investment grade companies impacted by the virus.
Although these responses have seemingly been successful so far at supporting the economy, we reiterate that we are still approaching the markets in a very cautious manner. It is not hard to imagine how these unprecedented actions could have unforeseen consequences in the future. But for now, these are the factors we believe are driving equity markets.
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