Insights

X Market Commentary: Fed Cuts Interest Rates to Near Zero
Posted on March 16, 2020

Market Commentary: Fed Cuts Interest Rates to Near Zero

Market Commentary

Stocks and bonds continued to be buffeted about by waves of data and policy actions designed to combat the coronavirus and the secondary effects of the virus on individuals, businesses, and markets.

Volatility has been real over the past two weeks, with most days being 1 percent swings up or down. Markets react quickly to new information and right now new information keeps coming to the market at a rapid pace, fueling this volatility in the near term.

  • A sharp decline on Thursday afternoon ended the longest bull market in history (a stretch of 11 years without a 20% decline). As the accompanying chart shows, investors who invested for the long-term benefited from this prolonged stretch of growth.
  • The Federal Reserve launched a large set of measures to firm up support for the financial system by cutting interest rates by 1%, taking their benchmark rate to near zero, and taking steps to provide banks extra liquidity through the purchase of bonds and the lowering of reserve requirements for banks.
  • The Senate is set to pass a bill agreed on by the president and the House to provide financial support for individuals and businesses while the country seeks to contain the coronavirus.
  • More businesses are having employees work from home. Churches and other organizations moved meetings online. The reduced interaction will shrink some key activities, but less interaction will help slow the spread of the coronavirus.
  • The president announced restrictions on travel to Europe, where the virus is spreading most rapidly. Some regions are closing restaurants or requiring diners to take their food home rather than be exposed to a wider group of people.
  • Sporting organizations cancelled tournaments and delayed or suspended seasons. Concerts are being cancelled, too.

Markets swung sharply higher and lower all week. The S&P 500 sank 8.7% during the week as rallies of 4.9% and 9.3% were cancelled out by a 9.5% decline on Thursday and declines of 7.6% and 4.9% on Monday and Wednesday. It was a week full of large moves. The MSCI ACWI dropped 12.4%. Concerns about market liquidity reduced bond prices. The Bloomberg BarCap Aggregate Bond Index dropped 3.2%.

Key Points for the Week

  • Stocks closed sharply lower after a week full of big swings up and down.
  • The Federal Reserve reduced rates and launched a new round of quantitative easing designed to support lending and the functioning of credit markets.
  • The president and the U.S. House agreed to fiscal support for individuals severely impacted by the coronavirus, which is expected to be passed by the Senate.

Investors should steel themselves for the volatility to continue. The economy is expected to slow sharply as the steps taken will result in less consumer spending and some declines in employment. As testing increases, the number of cases in the U.S. will likely rise substantially. Also, brace yourself for talk about recession to begin as economic activity slows down.

But investors also need to look forward. The federal government and the Federal Reserve have both taken steps to soften the blows to the economy. The strong steps taken to curtail the virus’s spread pressure the economy now, but they also may allow it to return to growth more quickly.

Covid Control Measures Have Meaningful Impact

The last seven days have been more eventful than anything seen since the financial crisis of 2008. Nearly every aspect of society is changing its actions to combat the coronavirus. One of the hard truths is the coronavirus spreads most rapidly when people are close together. Unfortunately, large amounts of economic activity rely on people’s proximity to each other and their ability to move around. Whether it is on an airplane, at a sporting event, or in a restaurant, people spend more money when they are on the move. When that movement is restricted, the economy is bound to slow.

As the virus disrupts broader segments of American life, some investors are viewing the actions of the federal government, state and local governments, and the Federal Reserve as further reasons to be concerned. Our analysis suggests these moves should be seen in the opposite light. Leaders are stepping up to take the necessary actions to shrink the long-term effects of the virus. Even if additional actions are required, these steps move us in the right direction. Below is a summary of some key decisions and how they may affect the economy.

China and South Korea have taken similar and even more dramatic actions to limit outbreaks of the coronavirus within their borders. Now those countries see more people recovering from the virus each day than new cases. If the U.S. is able to adopt similar measures, it could impact the long-term impact and spread of the virus.

As more information comes out, we will likely experience big market swings in both directions. After a long period of lower-than-normal volatility, the swings we are experiencing now can seem more abnormal than they really are.

During periods of surprise, stay steady and keep a strategic and long-term focus. Reach out to your advisor and talk any challenges through with them.