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U.S. Fed takes aggressive action to help equity, fixed income markets

The global government response to the coronavirus crisis continues to be significant in scope, Robison commented, noting that most nations around the world have either implemented, or are planning to implement, some form of stimulus. “Global governments are doing this in order to backstop individuals and businesses from going insolvent during this ongoing crisis. Essentially, this amounts to a whatever-it-takes approach on the part of governing bodies,” he explained.

These measures have been very reassuring to equity markets so far, Robison said. As evidence, he pointed to the S&P 500 Index, which has risen from its mid-March low of 2,200 to approximately 2,800, as of midday Pacific time on April 17.

The U.S. Federal Reserve has also taken unprecedented steps on the fixed income side, Robison noted. On April 9, the central bank announced that it will purchase high-yield bond ETFs and debt from fallen angels—companies that were rated investment-grade (BBB+) before the outbreak, but have subsequently seen their credit ratings fall to BB.

“In moving beyond investment-grade credit to the high-yield space, the Fed is now trying to backstop a much larger segment of the U.S. economy,” Robison stated. In doing so, the central bank is wading into a somewhat gray area of legality, he added, which is why the Fed has never taken such steps before. “Ultimately, these measures by the Fed show just how far the central bank is willing to go to help the nation pull through this crisis,” he observed. At approximately $750 billion, the size of the program is also remarkable, Robison said, adding that it makes up about 12% of the investment-grade credit and high-yield bond market.

Significant stimulus packages announced in Japan, Europe

Significant stimulus measures continue to take shape across the globe, Robison said, as evidenced by Japan’s recent $1 trillion stimulus package—which amounts to roughly 20% of the country’s GDP. In the eurozone, finance ministers recently approved a €540 billion stimulus package, while Italy recently unveiled a €400 billion guaranteed bank lending program to its corporate sector, he noted.

“Ultimately, it’s been very reassuring to see so many countries passing stimulus packages that backstop just about every sector of their economy,” Robison said, adding that there’s still plenty of capacity for governments to do even more.

Market outlook

Robison noted that while it’s impossible to predict how the virus will progress, the team of Russell Investments strategists continues to assess the outlook for markets through a cycle, valuation and sentiment framework.

“Our sentiment process indicates a positive outlook, as markets haven’t fully recovered yet from the extreme panic and selloff,” he explained. Meanwhile, the team’s cycle outlook is supported by an extremely accommodative monetary policy. Lastly, valuations —especially in the U.S.— have gone from overvalued prior to the market selloff to essentially flat, Robison said. While a high level of uncertainty still exists due to the spread of the virus, the team’s market outlook has improved on the whole as signs point to a bit of a recovery once the virus threat subsides, he concluded.