Last week was defined by market volatility, fledgling government policy responses, and a broader adoption of social distancing, both voluntary and directed.
All markets have been volatile, with the 10 Year US Treasury yield moving from 0.54% on Monday to 0.96% by end of day Friday. Atypically, as bond prices were falling, so, too, were equity prices, with the MSCI All Country World Equity Index falling 12.4%. Many equity indices ended their bull markets during the week. After Thursday’s close, the S&P 500 had fallen -26.7% since it peaked on February 19, 2020, officially ending the bull market that had begun on March 9, 2009.
In response to the increased market stress and expected economic impacts from the virus, central banks have been increasing monetary accommodation to markets. Early in the week, the US Federal Reserve injected $1.5 trillion in repo operations to relieve pressures building in US Treasury markets that were causing less liquidity than usual. On March 15, they announced purchases of $500 billion of US Treasuries and $200 billion of mortgage-backed securities (MBS) to return liquidity to both markets, and hopefully greater stability around the globe. They also cut the overnight lending rate to 0.00% – 0.25%, effectively the floor for that rate, which should help keep the cost of funds low for companies and consumers during the crisis.
Outside the US, the Bank of England made a surprise 50 bps rate cut and trimmed bank capital requirements to boost credit. Stimulus from the European Central Bank disappointed markets by keeping the deposit rate constant; however, the ECB expanded their Quantitative Easing (QE) program by up to €120 billion.
While we are encouraged to see central banks offer support for the financial system, even the central banks recognize that such stimulus will have only a limited offset to the economic or health effects of COVID-19. Lower borrowing rates will do little for the small business that has severely reduced foot traffic or the hourly wage earner who is unable to work. Unlike during the Great Financial Crisis, the financial system generally has worked as designed in recent weeks.
There is ample room for increased federal government activity to support people and the economy, though a few good steps have been taken. This week, Italy dedicated €25 billion ($28 billion) to help Italy’s broad economy and, specifically, the struggling health-care sector. In addition to the prior week’s stimulus, President Trump announced a national emergency to free up $42 billion in funds to aid state and local governments to respond to the virus. In addition, the US government will waive interest on student loans guaranteed by the government and will add to the US petroleum strategic reserves, a move to stabilize oil prices. While the White House and House of Representatives came to agreement on a stimulus deal Friday, there is growing awareness that the plan leaves gaping holes, particularly for what appears to be roughly 80% of hourly workers. Still, we recognize that in a crisis, interventions usually are iterative, meaning that the policies tend to evolve as they miss their mark or create unintended adverse consequences.
As of March 13, The World Health Organization (WHO) has confirmed 132,536 cases across 123 countries and territories. As the virus has spread, fears of getting or spreading the virus have encouraged the social distancing activities necessary to limit its spread. Numerous companies have implemented work from home policies, schools have closed around the world, and events such as trade shows, conferences, and arts and entertainment have been cancelled or postponed. These actions likely will have a significant adverse effect on economic growth. With the length and depth of the crisis undeterminable at this point, analysts remain highly uncertain about the impact on economic growth.
While some investment banks have made preliminary estimates regarding the potential economic impact of COVID-19, we think that it is too early to make estimates that are useful, and potentially confusing to offer predictions that really are just tosses in the wind. The last thing we need in a crisis is poorly informed data. Consider spending on air transportation. The reasonable scenarios include the status quo (no change from recent activity), a scenario in which government and business move to “essential” travel only, one that involves the prolonged closure of airports, and many scenarios in between. How could one possibly model the impact on consumer spending and economic growth with any reasonable accuracy so early in this crisis?
We will continue to monitor the situation, to hold steady with long-term investment strategies, and to be a resource for those with questions and concerns. As the human costs of this crisis are rising, our hearts go out to those who may be struggling or who are caring for loved ones dealing with health and economic effects of COVID-19.