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Last Sunday night the Federal Reserve cut interest rates to near zero. At the market open the following Monday, the Dow hit its emergency circuit breaker for the third time in two weeks, having fallen 10% at the open. The first circuit breaker trip was on March 9 and the second was on March 12. These market-wide halts are unprecedented in US markets- the last time this happened was after the 9/11 terrorist attacks when markets were closed for nearly a week. The average market decline in recessions over the past 70 years is 28%, while as of Monday’s close, the S&P 500 has fallen 29.5% from its closing record high on February 19.
On Tuesday the Federal Reserve announced it would buy significant amounts of commercial paper, the short-term loans that businesses rely on for funding to pay bills and other expenses. In the 2008 financial crisis, the Fed undertook a similar “Commercial Paper Funding Facility” (CPFF) program where it ended up purchasing about $350 billion worth of loans- about 20% of the $1.75 trillion-dollar commercial paper market. The Fed also announced loans for “primary dealers” which help provide liquidity in bond markets.
Also on Tuesday, Treasury Secretary Mnuchin pitched a $1 trillion response package comprising of loans, direct checks to individuals, the provision of liquidity for small businesses and an airline industry bailout. As part of the proposal, checks in the amount of $1,000 would be sent directly to families whose annual income was less than $100,000. The details of the package were still being ironed out and both the House and Senate had been working on their own stimulus package proposals. This news caused stocks to finish higher on Tuesday, sending the Dow Jones Industrial Average up 5.2% and the S&P 500 up 6%.
On Wednesday both the Dow and the S&P shed the previous days’ gains on the heels of mounting signs of unprecedented global economic contraction. When covid-19 news first began to spread, investors flocked to treasuries, driving their prices up and yields down, but in the past week as institutional investors sought to raise cash by selling treasuries, prices sagged while yields jumped. Additionally, ratings agency Moody’s stated it anticipates a wave of credit downgrades and corporate debt defaults, with companies such as airlines, hotels, cruises and automakers facing the greatest risk. As well, various financial firms have begun predicting a continued economic contraction in Q2 2020 while expecting a renewed expansion later in the year.
On Thursday all major indices exhibited modest gains- DJIA - 1%, S&P - 0.5% and Nasdaq 2.3%, after the Federal Reserve announced a new lending facility to ease the flow of credit and ensure that the nearly $4 trillion money market industry could weather sudden redemptions. Also on Thursday the Labor Department reported a jump of 70,000 to 281,000 in new claims for unemployment benefits last week- a number that is expected to rise as various states have reported their unemployment claims websites had crashed with so many people trying to file at the same time.
At the end of Friday, markets wrapped up their worst weekly performance since the 2008 financial crisis, when the S&P 500 tumbled 15 percent from where it began on Monday. The Dow fell 4.6%, closing at 19,173.98 and the S&P closed at 2,304.92, down 4.3%. Both indices have erased more than 30 percent in a month. Also on Friday Mnuchin announced that the administration had moved back the Internal Revenue Service (IRS) tax-filing deadline from April 15 to July 15 due covid-19.
On Sunday evening, futures for the three major indices plunged and triggered the 5% limit-down rule upon news that the Senate coronavirus rescue package (now $2 trillion in size) failed to get the 60 votes needed to proceed. Democrats argued the bill was mostly a “corporate bailout” that did not do enough for everyday workers. Additionally, James Bullard, President of the Federal Reserve Bank of St. Louis, told Bloomberg News that he is forecasting the US unemployment rate to hit 30% in the coming months and a 50% drop in gross domestic product.
Investors are now wondering whether we have “hit bottom,” as the major indices have lost over 30% of their value within a month’s time as well as how long this will last. Several states and major cities announced lockdowns last week in order to “flatten the curve,” an effort to spread out the number of c-19 cases over time so as to not overwhelm our healthcare systems.
On Saturday morning the president touted a drug combination consisting of hydroxychloroquine and azithromycin that could potentially help fight against c-19. Additionally, Gilead Sciences ($GILD), a pharmaceutical company, has been undergoing clinical trials of Remdesivir, an experimental drug which may also be used to fight the disease. Two of its five trials may read out results in early April.
A couple things will help alleviate anxiety in the days and weeks to come:
a time-frame as to when we can reasonably expect things to begin going back to normal
encouraging news regarding both the efficacy of our lockdown efforts as well as the efficacy of the aforementioned drugs towards fighting coronavirus
a stimulus package that will help those hardest-hit by the pandemic- small businesses, hourly workers, and the airline, travel and hotel industries
Until then, markets will continue to experience volatility as participants looking for safe haven assets increasingly turn to cash as this crisis worsens. But it will not be a matter of “if” we’ll get good news, but when.