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Volatility and uncertainty continues in markets with health conditions from the virus in China improving

by Fortem Financial March 16, 2020

Markets across the globe sold off last week as the coronavirus spread to over 125 countries and oil prices reflected last week’s failed OPEC+ negotiations. The markets gyrated wildly last week: for example, the Dow Jones Industrial average lost 2,013 on Monday, gained 1,167 on Tuesday, lost 1,464 on Wednesday, lost 2,352 on Thursday and ended the week with a 1,985 gain on Friday. Thursday’s selloff was the worst since October, 1987. Last week, all of the major indices entered a bear market (with declines of at least 20% from recent highs) to end the eleven-year bull market. Despite the strong gains on Friday, for the week, the Russell 2000® Index fell (-16.59%) followed by the Dow Jones Industrial Average (-10.36%), S&P 500® Index (-8.85%) and Nasdaq (‑8.18%). On Wednesday, the World Health Organization declared the coronavirus a global pandemic; policy makers around the world announced containment zones, school closures and event cancellations. The extent of the virus’ impact on the U.S. economy is yet unknown; but, businesses, especially those in the travel and hospitality industries, have already been hit hard.

Earlier this month, the Federal Reserve announced a half percent cut in the Fed Funds rate. Last Thursday, the Fed took further action with the purchase of $1.2 trillion of bonds; this injection of capital provided liquidity into the financial system. Other countries are employing similar strategies to support the global financial markets. The Fed’s quantitative easing enabled treasury rates to stabilize after historic lows on Wednesday (the yield on the U.S. 10-year closed at 0.54% on Monday); here, the Fed’s playbook from the financial crisis in 2008-2009 was helpful in stabilizing the bond markets.

On Friday, President Trump, in declaring the coronavirus a “National Emergency,” triggered access to $50 billion in emergency funds for national, state and local agencies to support emergency operation centers and hospitals in diagnosing and treating the virus. Separately, House Speaker Pelosi and Treasury Secretary Mnuchin agreed on a deal for legislation to provide additional support for businesses and individuals impacted by the pandemic. Conditions in China and South Korea are improving as daily reports from Wuhan added only a handful of new cases; South Korea is reporting more recoveries than new cases.

The economic disruptions caused by the coronavirus will continue to weigh on the economy for some period of time. Today, economic conditions, unlike those in 2008-2009, are modestly strong; this suggests that any recession should be less severe and enable both the economy and markets to recover more quickly. Market volatility will likely remain high, and momentum will likely be centered on the outlook for the coronavirus and the effectiveness of fiscal and monetary policies.

Over the Weekend:

  • In another emergency move, the FOMC cut interest rates to zero and started a new $700 billion QE program consisting of $500 billion in Treasury purchases and $200 billion in mortgages. A -25bp cut is a normal move. A -50 bp cut is an aggressive move. This -100 bp cut with other intervention gives a sense of the scope of the twin deflationary shocks the U.S. economy has been hit with in recent weeks.
  • The FOMC noted that “the effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
  • The Fed also took action related to the discount window, intraday credit, bank capital & liquidity buffers, and reserve requirements. Liquidity will be available.
  • Additionally, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced a coordinated action today to enhance liquidity via the standing U.S. dollar liquidity swap line arrangements.
  • Thru mid-Feb (just a few weeks ago), U.S. economic activity was actually improving as trade uncertainty ebbed, boosting mfg & jobs. But the twin shocks of (1) the coronavirus quarantine and (2) a global price war in oil have increased the odds of a contraction considerably. We’re estimating a 75% chance of a U.S. recession in 2020. The Fed’s action here should help (with a lag) to help create a recovery.

Source: Strategas, Pacific Global Investment Management Company

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Sincerely,

Fortem Financial
760-206-8500
team@fortemfin.com

 

 

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Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

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Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

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The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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