The second quarter of 2020 witnessed a strong rally in risk assets as the federal government utilized every tool imaginable to stabilize markets following the COVID-19 related selloff in March. With funds from the original COVID-19 relief package (the CARES Act) running low, Congress passed the Paycheck Protection Program and Health Care Enhancement Act in April, making an additional $320 billion in aid available to small businesses. More importantly for risk assets, on April 9th the Federal Reserve announced additional programs ostensibly designed to backstop credit markets, including its intention to purchase corporate bond ETF’s and certain fallen angel debt, provided it met certain criteria.
While the Fed can help support asset prices, it cannot produce cash flow or prevent defaults. With COVID-19 infections rising in some states, the question now becomes whether more lockdowns are in store and what the shape of the recovery will look like.