This past week saw another series of volatile trading sessions. The major indices ended lower on the week, but not without a late rally spurred by the president’s declaration of a national emergency Friday afternoon, finally acknowledging the risk covid-19 poses on the US and global economy. Still, they have all now entered “bear” territory, which is 20% or more from recent highs.
While cratering share prices reflect increasing investor pessimism, another growing concern is a building corporate debt crisis as consumers begin to self-isolate and decrease their spending, leading to potential cash flow issues as some companies struggle to survive, particularly those in the travel industry such as airlines and rental car companies.
In effort to stem economic decline, the Federal Reserve announced this evening they will be slashing interest rates to nearly zero, lowering borrowing costs to 0.0% to 0.25%- levels not seen since the 2008 financial crisis- in addition to buying $700 billion in Treasury and mortgage-backed securities. This comes in conjunction with similar actions being made by the Bank of England and the European Central Bank, among others, to ensure liquidity in dollar lending to help curb the effects of the spreading virus.
Another growing concern is liquidity in easily-traded financial instruments. Investors are having trouble buying and selling U.S. Treasuries, a highly unusual occurrence for one of the world’s most readily tradable financial instruments. The cost of funding for money that companies use to make payrolls and other essential short-term needs is rising for weaker-rated firms. The premiums on junk bond insurance are rising, and banks are beginning to charge each other more for overnight loans. It’s becoming apparent that financial market participants are beginning to panic and that will eventually lead to frozen credit markets and a true financial crisis.
So in the week ahead, we will see whether the government and the Fed take additional actions to prop up financial markets and keep liquidity in the system. In the meantime, I hope we begin taking more seriously the covid-19 threat and take steps to stem and contain its spread so we can get over the hump and get our economy running again. Wash your hands, social distance, and be safe.