Over concerns of global economic activity unraveling, on Sunday, March 15, the Fed moved aggressively to shore up both the US and global economies by dropping rates to near zero, promising billions in asset purchases and support for foreign central banks with cheap dollar financing. Fed Chairman Jerome Powell acknowledged the impact of the coronavirus on economic activity, particularly within industries like travel, leisure and their associated sectors. Uncertainty of the depth and length of the economic slowdown precipitated the move. “The economic outlook is evolving on a daily basis, and it is depending on the spread of the virus,” Powell said at the end of an emergency Fed meeting.
Stocks responded the following Monday, March 16, with the largest one-day percentage loss since 1987 on the Dow over concerns of the economic impact of the coronavirus. As the week dragged on, there was little improvement, with the S&P losing 400 points, bringing its year-to-date (YTD) return to -28.66%. The Dow fell 4,011 points, bringing its YTD returns to -32.81%, and the S&P TSX lost nearly 800 points, resulting in YTD returns of -30.54%. Circuit breakers, while slowing the fall, were unable to arrest the steep decline partially caused by tripped algorithm selling programs.
Despite the actions of central banks and government fiscal programs to assist businesses and families most affected by the virus, markets accelerated to the downside. Zero-interest rates for over four years in Europe have not stimulated economic growth and are likely to have the same result in North America. The equity markets are focused on the virus and the effect on global economies. At this juncture, low rates will not stimulate spending but will provide support and liquidity to the financial sector.
Volatility has extended into the bond market as well. Ten-year US treasuries decreased to just under 70 basis points after the Fed announcement, then jumping as high as 1.25% mid-week before finishing the week at .95%. Short-term Treasury yields decreased as the long end increased, sending the yield curve steeper than the last 12 months. As represented by bond ETFs, investment grade, high yield and emerging markets are all impacted by the same virus forces as the equity markets. The flight to safety is on the short end of the curve, at least for the moment.
It is hard to say what this week will bring. The core worry is, of course, the coronavirus and the resulting impact of slowing economic activity on various sectors of the economy as the virus spreads and state- and country-wide lockdowns expand. As we have seen in previous weeks, the impact of several ancillary factors is contributing to the volatility over the last four weeks, including:
- the fear of a socialist gaining the nomination of the democratic party,
- the first emergency cut in rates by the Fed to stall the falling equity markets,
- the failing negotiations between Russia and Saudi Arabia over oil productions cuts, and
- the second rate cut to near zero by the Fed.
Stimulative fiscal measures have had the opposite effect of calming the markets. Until the virus is contained, we should expect to see continued volatility in both equity and fixed income markets.
Senior Investment Consultant to Sightline Wealth Management
Warren Gerow is an independent consultant to Sightline Wealth Management.
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