700+ Point Market Turnaround – What Happened
On June 15th, 2020, the market fell 566 points at the open of the market due to concern over a spike in new coronavirus cases worldwide.
The market rose slowly all day from here…
And then rocketed higher toward the end of the day to close, up 158 points or 0.6% for the day.
The United States Federal Reserve spurred this 700+ point swing after it announced “an easing” for large companies to borrow money during this pandemic.
In this announcement The Fed said it’d buy up to $750 billion worth of individual corporate bonds. Previously it was only buying ETF’s.
Also, in the release is something important The Fed said that I need to illustrate…
In the release it said $750 billion worth of purchases is to “provide a funding backstop for corporate debt to Eligible Issuers so that they are better able to maintain business operations and capacity during the period of dislocation related to COVID-19.”
Emphasis above is mine.
If you ever see the term backstop when it comes to financial dealing it means putting a floor on something or to help fund something.
In this case, The Fed is supplying funding to certain companies so they can continue operations at current levels, so they don’t fail.
And its doing this through a “financial backstop” of buying their corporate bonds.
Essentially The Fed is now directly supporting individual companies and the entire economy with their recent actions.
Today’s announcement specifically to keep the credit markets open and flowing.
Now, I’m not a big government guy but this is an important step by The Fed To take.
Because if credit markets freeze up, these companies can’t pay their bills and they will fail.
Why is this important to you?
Because most larger businesses fund day to day business expenses like salaries and purchases of inventory and equipment on what’s called “commercial paper.”
This is a fancy term for short term loans – or also called corporate debt as mentioned above.
In 2007 and 2008 these “commercial paper” markets froze up which led to many bank and business closures.
The Fed doesn’t want this to happen again. And it’s doing everything in their power to avoid this from happening during this pandemic.
Larger companies need these kinds of short-term loans to fund their day to day operations. This leads to increased or at least continued economic output that we need nationwide right now.
But this isn’t just a good thing for large companies either… Its also good for us.
If credit markets freeze up like they did in 2007 and 2008 it makes it almost impossible for large businesses to fund their daily operations like mentioned above. But it also means there’s no money available for small businesses and individuals to take out loans with.
A credit market freeze would lead to harder or no access to some of the following loans as an example.
In a credit market freeze, access to these would go away for most of us unless the terms or the loan were horrible.
A credit market freeze right now would be disastrous because it would lead to lower business activity than there already is.
And this would lead to more business closures and even higher unemployment than we’re seeing today.
The Fed had to do this to keep things from collapsing economically already worse than they have.
Now, will this save us from all potential economic issues today and going into the future of this pandemic. No.
But what it does is give us time to continue recovering from the economic problems we’re already dealing with.