Here Comes the Federal Calvary

During most large negative economic shocks, sometime after the initial decline, you have the arrival of positive counterforces by the Federal Reserve and the Federal Government. The arrival of the “cavalry”, often coincides with the turn in the market though it is usually not the turn in the economy (which typically come 3-6 month later).

The cavalry did not disappoint this time around, starting with the Federal Reserve announcing the largest liquidity injection in history, buying bonds on a scale never seen before. If the current programs continue through year end the Fed’s balance sheet will be over $12 trillion or a staggering 62% of GDP. The bond market has responded by recovering materially from their record drop but is still healing and likely will continue to do so over the next month. But make no mistake, the Federal Reserve headed off a likely total collapse of our fixed income markets which would have been catastrophic.

Not be outdone, the Federal Government passed the CARES (Coronavirus Aid, Relief and Economic Security) Act. A $2.2 trillion money handout that expands of small business loans, increases corporate debt interest deductions, sends $1200 or greater checks to most taxpayers (with an income phase out at $150k per couple), bailouts for the airline industry, among other provisions. To put this in perspective the Federal Government was scheduled to spend a total of $4 trillion overall this year before the CARES Act just increased it north of six trillion. One issue of note is that if you were scheduled to take a Required Minimum Distribution (RMD) from your IRA, they are now suspended for 2020. This should result in a material tax savings for those over the age of 72.