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Can a Historic Stimulus Package Help Right the Economy?

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March 27, 2020

The president has signed a historic $2 trillion stimulus package aimed at stemming the economic impact of the coronavirus. That measure comes on the heels of the Federal Reserve (the Fed) promising to buy unlimited quantities of government debt and lend money to businesses and local governments alike. “There may not even be a word in the dictionary to adequately describe what we’re going through right now, except maybe ‘unprecedented,’” says Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank.

 

What are the policies trying to achieve?
The $2 trillion U.S. fiscal stimulus aims to help keep the economy going by distributing money directly to businesses to help them avoid layoffs, and to individuals and families affected by the crisis, to enable them to keep paying for necessities. Likewise, the Fed is purchasing financial assets to help keep money flowing through the economy at a time when investors have been selling at a furious pace.

 

Image of the United States Capitol building

“What the fiscal and monetary policies can do is to keep enough of the economy running that once we get past the shock of the virus, there’s an economy to return to.” — Michelle Meyer, head of U.S. Economics, BofA Global Research

 

Monetary policies are already having some positive effects, Hyzy says. “Capital is flowing more freely in the bond markets, and there’s better liquidity, though we still have a ways to go.” Still, fiscal and economic policies, no matter how large, can’t drive a recovery that first and foremost depends on signs that the health crisis is easing. “The heart of the issue continues to be the health data, and when infection rates crest,” Hyzy says. “We’re obviously not there yet.”

 

According to Michelle Meyer, head of U.S. Economics, BofA Global Research, “What the fiscal and monetary policies can do is to keep enough of the economy running that once we get past the shock of the virus, there’s an economy to return to.”

 

What could happen next?
As the record 3.3 million Americans filing for unemployment benefits last week makes clear, the economic crisis is far from over, says Meyer. “Jobs data for April, which will be released in early May, could reveal 4 to 6 million Americans with lost jobs, and an unemployment rate nearing 7%,” Meyer says.

 

Depending on when the health crisis eases, the economy could still “snap back,” thanks to pent-up demand from millions of consumers currently staying home, Meyer says. “More likely, though, we’ll see a long, slow, lackluster recovery with lots of bumps,” she adds. “There’s an important psychological element here, with people displaced from the workforce, quarantining and sheltering. It will take time for them to overcome fear and re-engage.”

 

“The three watchwords for a portfolio during times like these are growth, yield and quality.” — Michael Hartnett, Chief Investment Strategist, BofA Global Research

 

What can investors consider doing?
“The three watchwords for a portfolio during times like these are growth, yield and quality,” says Michael Hartnett, Chief Investment Strategist, BofA Global Research. “You need exposure to growth because there’s not a lot of it around right now.” Promising areas may include technology, health care and consumer staples, notes Hyzy. “With U.S. Treasury rates at historic lows, investors may find potential for yield with investment-grade bonds, municipal bonds or dividend-paying stocks," he adds. Quality means exposure to stocks or bonds of companies with especially strong balance sheets. Your advisor can help you review your current investment mix in light of the current market environment.

 

Information is as of 03/27/2020

 

Opinions are those of the author(s) and are subject to change.

 

The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for Global Wealth & Investment Management ("GWIM") clients, is part of the Investment Solutions Group (“ISG”) of GWIM, a division of Bank of America Corporation (“BofA Corp.”).

 

BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and wholly owned subsidiary of Bank of America Corporation.

 

Investing involves risk, including the possible loss of principal. Past performance is no guarantee of future results.

 

Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

 

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

 

Stocks of small-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.

 

Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets.

 

Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa.

 

Municipal securities can be significantly affected by political changes as well as uncertainties in the municipal market related to taxation, legislative changes, or the rights of municipal security holders. Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal Alternative Minimum Tax.

 

There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors.

 

Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration.

 

Dividend payments are not guaranteed, and are paid only when declared by an issuer's board of directors. The amount of a dividend payment, if any, can vary over time.

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