The stock market looks poised to have a positive week of returns with the S&P 500 up 14% as of the end of Thursday after falling significantly the previous two weeks. The rebound in the market is a reaction to the $2.2 trillion stimulus bill that passed the Senate on Wednesday and the House today. To help put the dollar amount in perspective, the total tax revenue collected by the Federal government was about $3.5 trillion in 2019, according to the Congressional Budget Office.
The bill’s many provisions include direct payments to millions of individuals and families, increased unemployment insurance for workers who lose their jobs, loans to businesses that are “severely distressed” due to the virus (including the airlines), aid for hospitals to help fight the virus, and emergency help for state and local governments.
Earlier in the week, fear had driven investors to avoid purchasing even highly rated corporate and municipal bonds. This lack of buyers caused bond prices to fall and the Federal Reserve expanded their bond buying program to help stabilize prices. Their efforts were successful and the Barclays U.S. Aggregate Bond index is up 2%, and the Barclays Municipal Bond Index is down less than 1% for the year to date as of Thursday.
It is worth noting that bonds behaved very similar when the markets dropped in 2008 and 2009. For a time, investors only wanted to own Treasury bonds instead of corporate and municipal bonds. However, looking back at that period, less than 0.5% of corporate bonds and less than 2% of municipal bonds rated as “investment grade” defaulted and failed to make their payments (according to data from Moody’s and S&P bond rating agencies). Therefore, corporate and municipal bonds proved to be relatively safe investments.
It is an encouraging sign to see the markets have a good week. However, we do expect the volatility in the markets to continue. The number of Americans who filed for unemployment benefits shattered the record at 3.28 million new claims for the week ended March 21. The previous record had been 695,000 jobless claims for a single week. It is likely that the U.S. is headed for a recession. The length of the recession and time people are out of work depends on the magnitude of the coronavirus outbreak. Until there are signs that the number of infections are close to peaking, the market will likely not have a clear path to recovery. Until then, stay confident in your investment plan and stay healthy!
