Fed Action and Coronavirus Bear Market 2020

Fed Action and Coronavirus Bear Market 2020

The Federal Reserve announced emergency actions to guard against the coming economic impact of Coronavirus.

The Fed slashed its benchmark interest rate by one percent to near zero (the lowest level since 2015); it will buy at least $500 billion in Treasuries and $200 billion in mortgage-backed securities over the coming months to help unclog the plumbing of global financial markets (known as “Quantitative Easing or QE”); and it will work with other central banks (the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank) to help global funding markets, this move is intended to encourage other central banks to use dollars to help their own financial systems.

The Fed also announced a series of steps to boost bank lending by dropping the rate the Fed charges through its discount window to banks for short-term emergency loans from 1.75 percent to 0.25 percent; and it also wants banks to tap their reserves to lend to households and businesses affected by the coronavirus.

Before the announcement, economists were downgrading their estimates for U.S. growth, with most predicting at least one or two quarters of negative growth, leading to a zero growth year for 2020, down from pre-virus estimates of two percent. Still, they emphasize that until more data emerge and until there is an indication of how long this lasts, it’s hard to even guess. One of the first reports that could show damage is weekly jobless claims, which will be released Thursday. It is expected that there could be layoffs from airlines, cruise operators, ports, hotels, restaurants and energy companies.

R.I.P. Bull Market (03/2009-03/2020)

All major U.S. stock indexes are now in a bear market, defined as a drop of at least 20 percent from all-time highs. In an agonizing week where “global health pandemic” became a household phrase, the second order effects were playing out in financial markets. In the span of five trading sessions, there were two, 15-minute trading halts triggered; and volatility spiked, as stock indexes whipped from heart-wrenching plunges (03/09 was the worst day for stocks since the financial crisis, 03/12 was the worst day for stocks since the Oct 1987 crash) to record-setting gains (03/13 was the best day for stocks since 2008).

You are not crazy if you feel like the ride has been frightening. In the span of just one month, the S&P 500 has gone from a record high (Feb 19) to a bear market, wiping out about a quarter of the index’s value. And yet, when the five-day cycle was complete, it was amazing to feel like 8 to 10 percent losses were a win, a sure sign of bear market mentality taking over investors’ psyches.

Friday provided a respite in the presidential declaration of a national emergency, freeing up $50 billion to fight the virus, and the Congressional action to provide a backstop in the form of paid leave, enhanced unemployment insurance, more money for SNAP and increased federal funds for Medicaid. But investors were not convinced, and pulled $47.4 billion out of global stock-focused mutual funds and exchange-traded funds in the three weeks ended Wednesday, according to an analysis by Bank of America Global Research.

MARKETS:

  • DJIA: 23,185, down 10.4% on week, down 18.8% YTD

  • S&P 500: 2711, down 8.8% on week, down 16% YTD

  • NASDAQ: 7874, down 8.2% on week, down 12.2% YTD

  • Russell 2000: 1210, down 16.5% on week, down 27.5% YTD

  • 10-Year Treasury yield: 0.981% (Record intraday low of 0.%)

  • Crude: $32.97 (down 20.7%, down 46% YTD)