• Trillions of stimulus dollars prevented a global depression in 2020, and there are key macro impacts that may last decades

• Investors must adopt a dynamic macro asset allocation strategy to effectively manage risk

• We outline what happened during the pandemic, why it happened, and what it means for today’s investor

The COVID-19 pandemic set the global economy on a new path versus the relatively stable decade of the 2010s. The era of low growth and low inflation ended as governments and central banks pumped stimulus into the financial system to thwart the negative impacts of strict lockdowns and, of course, the loss of millions of lives. 

Also fresh in the minds of policymakers was the 2008 Great Financial Crisis. Memories of a freefalling stock market, soaring and long-lasting unemployment jumps, and corporate bankruptcies were vivid—that scenario wanted to be avoided at all costs. As a result, the Federal Reserve and Congress swiftly put in place programs to prop up the economy that had never been seen before. 

The 2020-21 period was a turning point for macro investors too. As liquidity was pumped into the system, inflation eventually reared its head, causing the Fed to lift interest rates beginning two years after the market crash of 2020. We now find ourselves in a world with uncomfortably high inflation, normalized interest rates, and uncertainty as to how monetary and fiscal authorities will respond to the next crisis. Let’s dive into what all transpired before and after 2020 and why it continues to play a critical role in today’s policy choices.

Leading up to March 2020, there were geopolitical concerns that an illness spreading across China would be just another confined and short-term disease. The Bird Flu, SARS, and H1N1 were tragic, but they did not have far-reaching impacts. Recency bias, among other factors, caused investors, health experts, and those in charge of steering economies around the world to broadly look beyond what was going on in Wuhan, China. 

Just pull up any of the 2020 sellside market outlook reports—nobody had a global pandemic as even a possible risk. Like so many of the biggest market-moving events, it’s the risks unseen that tend to bring about the most volatility. In early 2020, the Fed was still buying mortgage bonds, the Fed Funds rate had come down from its 2019 high of 2.25-2.5% to 1.5-1.75% and the bias was toward more, not less, stimulus. Then came March of 2020.

Fed Funds Rate History: The COVID-Era ZIRP

Source: St. Louis Federal Reserve

The S&P 500 began 2020 on the rise. There was a melt-up of sorts from October of the previous year to February of the election year, with US large caps jumping almost 20% even as the respiratory disease caused by a coronavirus known as SARS-CoV2 emerged in Southeast Asia. 

The SPX began to sink in the back half of the first quarter, before the nightly news reported on illness counts and deaths. Looking back, it was a clear reminder that stocks discount the news and are often the first to react. By the middle and tail end of March, the Fed knew it had to respond to support markets.

S&P 500: A 34% Crash in February-March 2020 Followed by a Sharp Recovery

Source: Stockcharts.com

Monetary Policy

On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a global pandemic. President Trump announced that it was a national emergency two days later. It was also a mainstream panic as the NBA canceled the remainder of its season, Tom Hanks and Rita Wilson took to social media to confirm they came down with the virus, and the president banned travel from 26 European countries. With stocks down 15% in just a few weeks, it was time for the Fed to act.

Fed Rate Cuts: Setting the Stage for a Market Recovery

The Federal Open Market Committee (FOMC) cut its target for the Federal Funds rate by 1.5 percentage points between March 3-15. That’s all the ammo the Committee had with its policy rate, though. Quickly back in a “zero-interest-rate policy” (ZIRP) framework, they were forced to take additional measures to prevent another financial system collapse—and they had to do so quickly.

Slashing interest rates (to zero percent in that instance) is usually done to lower borrowing costs for individuals and businesses and encourage consumer spending. That process takes months, though, and time was not something the Fed could afford to wait on. While bond yields cratered, that did little to suggest that the US economy would rebound.

Indeed, lower interest rates on their own were not enough to halt the stock market decline. The S&P 500 continued its plunge for several more sessions, ultimately bottoming on March 23. 

Forward Guidance: Shaping Market Expectations

Tweaking the policy rate is not the only arrow in the FOMC’s quiver, though. Chair Jay Powell was a firm believer in using guidance as a policy tool, and the Fed’s communication strategy played a crucial role in the market eventually stabilizing. He assuaged investors’ fears that the Fed intended to maintain an accommodative policy for however long it would take, thereby anchoring long-term interest rate expectations. 

At the time, Powell and the Committee had decent credibility. Despite being jawboned by President Trump during the rate-hiking period of late 2018, trust was high in the Fed—not only among US investors but also by policymakers worldwide. Reassuring words by monetary authorities helped to reduce uncertainty and encourage risk-taking, and the rally that ensued from late March through the next 21 months was proof that words matter.

Quantitative Easing: Flooding the System with Liquidity

While language and tone are part of monetary policy, credibility relies on the promise of action. The Fed was not timid about executing tremendous quantitative easing (QE) via asset purchase programs to ensure functioning Treasury markets and revive the real estate market. It intervened directly in markets in unprecedented fashion by buying corporate and municipal bonds so that defaults would be avoided, job losses would be minimized, and workers could keep receiving paychecks. 

On March 23, it announced an unlimited QE policy, and over the ensuing two years, the Fed expanded its balance sheet by $5 trillion, thereby increasing the money supply and stimulating the economy. By the middle of 2020, the Fed had moderated its QE from emergency levels to buying $80 billion per month in Treasury securities and $40 billion per month of agency mortgage-backed securities (MBS). Its balance sheet was still growing, however, and it would take the inflation shock of 2022 for Powell and the rest of the Committee to get serious about fighting rising consumer price levels.

Along with forward guidance, QE was key to the market’s recovery in three primary ways:

1. Lower bond yields nudged investors into taking more risk with their capital

2. Higher confidence that the Fed would be a buyer of last resort quelled fears of vast corporate bankruptcies occurring

3. Massive stimulus and the notion of the Fed buying corporate bond ETFs reduced the chance of a deflationary spiral depending on how COVID-19 unfolded

The Fed Bought ETFs During COVID

Source: BofA Global Research

For dynamic macro portfolios, intense QE and the Fed playing the role of the last buyer presented opportunities to get long areas of the market that could benefit most from a recovery. Often, when conditions go from “terrible” to just “bad,” that’s when big gains avail themselves. 

Hence, buying stocks when the Cboe Volatility Index (VIX) was above 70 took great courage, but it proved to be the right strategy in March and April of 2020. All the while, death counts rose, and new variants of the novel virus emerged—that proved to be the wall of worry markets so often like to climb.

Main Street Lending Program: Supporting the Real Economy

The usual monetary policy game plan was tossed to the curb in March and April of 2020. In a unique departure from its traditional banking purview, the Fed introduced the Main Street Lending Program (MSLP) to support small- and medium-sized businesses. The program offered $600 billion in loan facilities to employers economically impacted by the pandemic. The Fed put in place preferential terms qualifying businesses so that operations continued, and payrolls could be met.

Fiscal Policy

The Fed worked in tandem with Congress to keep the US economy, and effectively the global economy, running as families sheltered in place. The private sector proved its flexibility and innovation through remote work and a surprise jump in small-business formation, including high-propensity firms that were likely to grow their payrolls. But the small-business renaissance that came about in 2020 and 2021 was underpinned by big-time fiscal stimulus.

New Business Applications Skyrocketed in 2020

Source: Census Bureau

“Gimme That Stimmy”

The COVID era brought about a new term: stimmy. It was a colloquial word capturing the almost child-like excitement around receiving government checks one after another. 

The first stimulus package was signed into law on March 6, 2020. It was small, allocating just $8.3 billion to fund vaccine research, give money to state and local governments to fight the virus, and help overseas nations do the same. 

Round 2, the Families First Coronavirus Response Act (FFCRA), was inked 12 days later. It too was targeted, helping families who relied on free school lunches for their kids to receive some support and boosting paid sick leave requirements for companies with fewer than 500 workers. 

The third stimulus package was the bazooka. The Coronavirus Aid, Relief, and Economic Security Act (CARES) appropriated $2.3 trillion in aid. Direct payments were made to individuals and families ($1200 per person plus $500 per child), major expansions of unemployment benefits, $500 billion in loans to companies impacted by COVID-19, $349 billion in additional loans and grants to small businesses, $175 billion directed to hospitals and healthcare providers, $150 billion to state and local governments, and $31 billion aimed at helping schools and universities.

The fourth stimulus boosted small business lending, while Congress passed Round 5 in December 2020. For the third time in less than a year, Americans were set to receive a direct deposit from Uncle Sam. It was a $900 billion bill that included a $600 direct payment per person, including dependents ages 16 and younger, to individuals making $75,000 or less in 2020 or 2021. This third stimulus check amount was raised to $2,000 in early 2021.

Consumer Spending Trends Around Stimulus Programs

Source: BofA Global Research

While hindsight is 20/20, it was clear that stocks within the Consumer Discretionary sector, particularly e-commerce equities, were perhaps the biggest beneficiaries of direct household payments. One of the big ETF winners was the Amplify Online Retail ETF (IBUY) which soared from $33 on March 16, 2020, to above $118 by late December of that year.

IBUY’s Stimulus-Induced 2020 Rally

Source: Stockcharts.com

PPE Purchases: Creating New Market Winners

Non-store retail wasn’t the only big winner as the fiscal response grew. Manufacturers, like 3M (MMM), were incentivized to rapidly produce personal protective equipment (PPE) to help first responders. Those on the front lines were deemed heroes, but they often were not compensated for the risks they were taking. PPE purchases by the federal government helped to ensure that healthcare workers and other emergency personnel had all of the tools and equipment needed to not only help patients but also preserve their safety. 

A dynamic macro portfolio that could pivot to sectors and industries that were direct beneficiaries of PPE-related fiscal stimulus had the potential to outperform without taking the risk of going all-in on high-beta online retail stocks.

PPP Loans 

The Paycheck Protection Program Liquidity Facility (PPPLF) was part of the $2 trillion stimulus bill passed in March 2020. It loaned money to commercial banks who then loaned to small businesses through the Paycheck Protection Program (PPP). These were forgivable loans to the nation’s most important job-growth engines. 

It was initially successful in that high-touch service industries, like hotels and restaurants, were able to preserve their payrolls, but as the program grew, some nefarious actors took advantage of the relaxed terms. Misuse and a lack of oversight fostered many high-profile individuals and businesses who were not intended to receive business stimulus raking in significant sums. It was reported that famous actors, sports icons, and billionaires took PPP loans.

The PPPLF certainly helped the broad small-cap slice of the US stock market. It also fueled alpha in the risk-on Industrials and Energy sectors in the 52 weeks following the S&P 500’s bottom—two spots that often perform well when small caps outperform. 

Debt-to-GDP Ratio: Long-term Implications

“There’s no such thing as a free lunch.” - Milton Friedman

Almost $5 trillion of total fiscal stimulus went out to households and businesses from 2020 through early 2022. The US economy rebounded sharply even as COVID’s death toll worsened in Q2 2020; the domestic recession lasted all of two months thanks to massive monetary and fiscal responses. Along with the Fed’s balance sheet ballooning from $4 trillion to $9 trillion over a bit more than two years, the national debt jumped from $23 trillion in early 2020 to $28 trillion a year later. 

The Fed’s Balance Sheet Rose from $4 Trillion to $9 Trillion

Source: St. Louis Federal Reserve

The debt-to-GDP ratio, which was already problematic before the China Virus, was 107% at the end of 2019. Twelve months later, it stood at a record high of 126%. While the US is more indebted than other nations, we have seen comparable debt-to-GDP increases in Europe. 

Looking ahead, if the current fiscal path plays out, then some claim that total federal debt held by the public (which is a lower figure than total federal debt outstanding) could reach 300% by 2050.

US Gross Federal Debt to GDP: A Record High in 2020

Source: Trading Economics

Global Debt Ratios Rose During the Pandemic

Source: BofA Global Research

It’s not surprising that gold and bitcoin have done so well in the wake of the flood of government stimulus. The interest-rate rise that began in August of 2020 was crippling for those with a 100% bond portfolio, though TIPS outperformed in 2021 and 2022 as the CPI rose to a four-decade high by June 2022. 

Diversification across asset classes based on macro developments was important to earning real returns net of inflation. Going forward, concerns about the dollar’s position as the world’s reserve currency could come about as US debt levels continue hitting records.

Winners and Losers: The Importance of Dynamic Asset Allocation

Now years removed from the pandemic, it’s fascinating to look back on what areas of the stock market outperformed. The best S&P 500 sector return in the year following the March 2023, 2020, market bottom was Energy. The oil & gas space rose an even 100%, and most of those gains came after WTI crude oil went pear-shaped in April of 2020, falling into negative territory for the first time. Materials, Industrials, and Financials were each up between 87%-94% in the 12 months following the bear-market bottom. 

So, while many folks associated mega-cap growth with being the stars of the COVID recovery, it was actually cyclical and value sectors that did the best.

S&P 500 Sector Returns in the 12 Months After the Market Bottom

Source: Stockcharts.com

Still, Information Technology, Communication Services, and Consumer Discretionary did just fine. Those three areas posted 86%, 86%, and 76% returns, respectively. Lagging were defensive niches like Real Estate, Health Care, Utilities, and Consumer Staples.

Of course, some of the biggest single-stock winners were tech, e-commerce, and stay-at-home plays. Amazon (AMZN), Zoom (ZM), and Peloton (PTON) went parabolic at times. ZM, specifically was up more than 700% YTD through mid-October in 2020.

Shares of the vaccine-makers Moderna (MRNA), Pfizer (PFE), and Johnson & Johnson (JNJ) were up, but returns were disparate. MRNA turned into a meme stock of sorts, rocketing from $18 in February 2020 to $497 by August 2021; the stock was down 90% from its all-time high by the end of 2024, however. As for PFE and JNJ, despite being successful in President Trump’s Operation Warp Speed, the pharma giants generally struggled compared to the broader market.

Vaccine Stocks: MRNA Popped Then Dropped, While PFE and JNJ Lagged

Source: Stockcharts.com

We touched on strength in the Consumer Discretionary sector and commodities earlier, but some of the losers initially were travel and hospitality stocks as well as enduring relative weakness in Real Estate. While trillions of stimulus dollars revived consumer spending on goods, services was left behind until the grand re-opening took place in 2021. Real Estate continued to lose ground to the S&P 500 for years after the pandemic amid higher interest rates and as work from home turned out to be a paradigm shift in the way companies big and small do business, pressuring the commercial property market.

Wealth and Purchasing Power Since 2020

The COVID-19 pandemic and the global policy response resulted in major changes to household balance sheets and consumers’ purchasing power. US CPI was 225 in May of 2020. Twenty-five months later, it was 295, resulting in more than 30% cumulative inflation in about two years.

Household Balance Sheets Improved Thanks to Stimulus, Asset Appreciation, and Wage Gains

Source: Apollo Global

But workers received significant wage increases in 2020 and 2021 to cushion the blow; the biggest gains coming among low-wage earners. Real income gains were fleeting, though, and each month of 2022 featured a negative change in US household real disposable income growth. 

The destruction of purchasing power care of high inflation took a toll on consumer sentiment and angst among the electorate. President Biden’s approval rating was sharply negative from 2022 through his last days in office by early 2025.

US Real Disposable Income Growth YoY: Positive in 2020, Negative in 2022, Recovery in 2024

Source: St. Louis Federal Reserve

Biden’s Low Approval Rating Underscored the Public’s Disdain for Inflation

Source: Real Clear Politics 

Individuals who were invested and stayed invested through the pandemic came out in pretty good shape, particularly if they were also homeowners who locked in low fixed-rate mortgages in 2020 and 2021. Most diversified portfolios earned significantly positive inflation-adjusted returns from 2020 through 2024, even with a bear market in both the stock and bond markets in 2022. 

Unfortunately, the wealth gap has only grown post-pandemic. The top quintile of wealth is richer than ever while the lower and middle classes struggle to keep pace with today’s higher cost of living. Baby boomers are collectively in ideal shape given huge real estate gains, better bond market yields, high savings account rates, and hardly any exposure to 7-8% mortgage rates. Young families and first-time homebuyers face challenges, however. Stock market valuations are elevated and taking on debt is costlier now than it was pre-pandemic.  We at Allio hope with wise savings habits and savvy macro investment strategies the middle class can recover.  

The Bottom Line

COVID-19 changed the way investors should think about global markets. Intense monetary and fiscal stimulus helped economies recover, but the resulting hangover could last decades. Government debt levels are high, interest rates have normalized, and investors sitting in cash as well as those without financial or real estate assets have suffered. While there have been winners and losers, it’s clear that a dynamic macro portfolio is key to long-term wealth-building. 

Allio’s Macro Dashboard is designed to help investors spot trends among asset classes and position their portfolios for success.