Last week, stocks suffered historic losses as worries over the coronavirus (COVID-19) infection rate in Europe and North America dominated the news, creating panic-like conditions in not only the markets but also in retail outlets like Costco and Walmart.
On Thursday, March 12, the Dow and the S&P 500 were down about 27% from the recent high in February. On Friday, March 13, the markets enjoyed a rebound, finishing the week down but improving the year-to-date return to -18% YTD on the Dow (compared to -27% YTD of the previous day) and -16% YTD on the S&P 500, having entered into what is considered bear market territory on the previous day.
Focused on relief, investors turned their hopes to central banks offering monetary relief in Europe, the UK, Canada and the U.S. In Europe, the European Central Bank (ECB) approved a stimulus package that included low-interest loans to banks to help the economy cope with the additional cost of the virus while keeping the interest rate steady. The markets were not convinced and pushed lower during the week. Fiscal measures were to follow.
Germany passed a package of measures to help businesses, which comes in addition to a three-year, 12.4 billion euro infrastructure spending package. The UK announced a rate cut and a 30 billion pound spending package to help offset the impact of the COVID-19 virus. Property taxes were eliminated on some businesses, the Bank of England announced 100 billion pounds in funding for small businesses, and credit restrictions were reduced, permitting lenders to add another 200 billion pounds into the economy.
In Canada, the Bank of Canada reduced rates by .75% in response to COVID-19 and collapsing oil prices resulting from the failed negotiations last weekend between Russia and Saudi Arabi over production cuts. Finance Minister Bill Morneau announced a 10 billion CAD credit facility program for small businesses. Prime Minister Justin Trudeau also suggested Ottawa was looking into additional ways to help small businesses and individuals whose income is disrupted by COVID-19.
In the U.S. last week, President Trump criticized the Fed for not responding to the expected weakening economic activity resulting from the virus. (The 50-basis-point drop in the federal funds rate the previous week was brushed off with further equity declines.) The White House has been working with Congress to prepare a fiscal relief package acceptable to both sides of the aisle. Some sort of relief package should be released in the coming week. Trump’s travel bans were not considered an adequate response to the expected outbreak. Sunday evening, the Fed announced they were going to drop the federal funds rate to 0% and launch a massive $700 billion quantitative easing program to shelter from the effects of the virus. They also reduced the emergency lending rate for banks, lowering the rate on discount window borrowing by 125 basis points to .25% and increased the term to 90 days. As was the case with the previous Fed action, the market does not seem convinced and initially projected a 1,000-point drop on Monday morning.
From China, the news is encouraging as reports are surfacing of factories reopening. Power consumption is up over the February average, restaurant chains in major cities are reopening, and construction, one of the worst-hit sectors, has achieved a 58% restart rate. After a dismal purchasing managers index in February, it is suggested that the March survey could demonstrate a potential V-shaped recovery.
WHAT WE CAN EXPECT
At least in the short-term, we expect markets to continue to have wild swings with a downward bias. As mentioned last week, markets will be watching the rate at which infection increases, infection peaks and then declining infection rates. Fiscal and monetary responses and economic data releases will also be at the top of investors’ minds. To date, the market is not convinced the monetary responses will be meaningful to Main Street and have done little to support the market. Fiscal responses take bureaucracy to process, and with most everyone working from home, it may be too little too late. Travel bans and closed borders may help contain the virus, but economic conditions will continue to deteriorate until everyone can return to work and supply chains are working normally.
Our focus this week will be watching closely on the market’s response to the Fed actions this weekend and the news from China, as well as economic releases on Tuesday, housing starts on Wednesday and the leading indicators on Thursday.
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