Clearly, the markets could use some help right now, and fortunately, we do think help is on its way. Until then, if we want an easy way to recall what we see as four meaningful pillars of support for the markets going forward, we simply need to remember the word, “HELP.”
Housing – the housing market is in good shape, marked by high affordability and low supply, while lower interest rates should spark a refinancing boom that will put more money into the average American’s pocket, supporting both consumer sentiment and spending. It is also worth noting that the US consumer is about 70% of overall GDP.
Equities – are attractively valued relative to bonds, with the dividend yield on the S&P 500 Index approximately 150 basis points (bps) above the yield on the US 10-Year Treasury note. If history is any guide, stocks are not only a much better bet than bonds going forward, but we are close to a bottom for the market.
Liquidity – risk assets are selling off, but equity and fixed income markets aren’t seizing. And while high yield spreads have widened out, much of that has been driven by the bonds issued by energy companies, which are feeling the pain of sharply lower oil prices. And the Fed announced it is injecting $1.5 trillion into short-term funding markets.
Policy – policy makers have responded and should continue to respond to the fallout caused by COVID-19; the Federal Reserve has essentially taken interest rates to zero, committed to buying at least $700 billion in Treasury and mortgage backed securities, and injected credit directly into the markets. On the fiscal policy front, we are seeing Washington, DC take measures commensurate to the challenges facing the economy and markets, with President Trump declaring a state of emergency and making $50 billion in aid immediately available to the states, and the House of Representatives passing legislation that will provide for free COVID-19 testing and more funding for Medicaid. We expect more fiscal stimulus soon and believe it will be monetary and fiscal policy that both puts a floor under risk assets and sets the stage for a reacceleration in economic growth into the back half of the year.
Tagged: Tim Holland, weekly wire, market perspectives, S&P 500 Index, Coronavirus