Investment Commentary – March 3,2020

Year to Date Market Indices as of Market Close March 3, 2020
• Dow 25,971 (-9.18%)
• S&P 3,003 (-7.04%)
• NASDAQ 8,684 (-3.22 %)
• Gold $1,641 (8.00%)
• Oil $47.10 (-23.05%)
• Barclay Bond Aggregate (3.88%)
• Fed Funds Rate 1.25 (-0.50% 3/3/20)
• US Real GDP Growth 2.1 Q4/2019

Why stocks tanked despite the Fed’s emergency rate cut

The stock market tumbled Tuesday, with investors apparently rattled rather than comforted by the Federal Reserve’s decision to deliver a rare, emergency rate cut aimed at shielding the economy from disruptions caused by the global spread of COVID-19.

“I think the Fed’s rate cut backfired in many ways. Instead of soothing the market, it’s reignited investors’ worst fears,” Michael Arone, chief investment strategist for State Street Global Advisors, told MarketWatch in a phone interview.

Stocks initially jumped after the Fed announced a half-point cut, but gains proved short-lived. The Dow Jones Industrial Average DJIA, -2.94% fell nearly 1,000 points at its session low and ended the day down 785.91 points, or 2.9%, at 25,917.41, while the S&P 500 SPX, -2.81% dropped 2.8% and the Nasdaq Composite COMP, -2.99% lost 3%.

Meanwhile, investors piled into safe-haven assets, including Treasury’s, driving the yield on the benchmark 10-year note TMUBMUSD10Y, -14.50% below 1% for the first time ever. Yields fall as debt prices rise.

What gives? Here’s what analysts and investors are saying about the Fed decision and the market reaction so far:

Fears that things may be worse than they look

While an interest-rate cut was good for a knee-jerk positive reaction in equity indexes, gains soon faded as the initial euphoria gave way to questions about just how worried policy makers must be to prompt such a rare move. It signals to investors “that policy makers are grasping significant uncertainty and rapidly mounting downside risks,” said Lara Rhame, chief U.S. economist at FS Investments, in an interview.

Wrong medicine for a supply shock

There is also the longstanding question of how effective monetary stimulus, and even some forms of fiscal stimulus, can be in the face of what is likely to be a “supply shock” — the type of economic hit caused by the absence of goods and services as the virus forces factory shutdowns and curtails transportation and travel. Monetary and fiscal stimulus is typically aimed at mitigating demand shocks, which are sharp cutbacks in spending by households, businesses or governments.

Around the Web

Coronavirus correction: The deepening coronavirus outbreak sent shocks through global financial markets, producing the biggest weekly loss since 2008 for major U.S. stock indexes. The S&P 500 plunged into a correction—a decline of 10% or more from a recent high—and lost more than 11% for the week. The losses were similarly steep for the Dow and the NASDAQ.

Oil skids: The economic damage from the coronavirus outbreak weighed on crude oil prices, which tumbled to multi-year lows. U.S. crude oil fell about 16% to around $45 per barrel—its lowest closing price since December 2018—and oil and gas stocks also took big hits.

February’s U-turn: The market’s gradual rise to record highs over the first three weeks of February took a sudden turn in the final week of the month, resulting in heavy losses for equity indexes. The Dow dropped around 10% for the month, the S&P 500 tumbled around 8%, and the NASDAQ fell around 6%.

Volatility alarm: An index that measures investors’ expectations of market volatility over the next 30 days is seeing red. After ending the previous week at 17, the Cboe Volatility Index, or VIX, spiked on Friday afternoon to around 47—the highest level since at least October 2011—before closing at 40.

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Jobs and unemployment, U.S. Bureau of Labor Statistics
Consumer credit, U.S. Federal Reserve

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.