Winter in Springtime

Winter in springtime.  Stocks rallied in an epic snapback on Friday in response to Government action.  The move in stocks almost made up for the prior day’s loss which was the largest single day percentage loss since 1987.

 

N O T E W O R T H Y – Special Edition

 

News Flash. Yesterday, WHILE YOU SLEPT (or searched for toilet paper) the Fed announced another -1% cut to the Fed Funds rate, a +$700 billion increase in the balance sheet, and a number of lower restrictions for banks. Stock futures opened sharply lower in Asia quickly going to limit down and bonds soared. Chairman Powell held a press conference in lieu of this week’s FOMC presser.  In it he stated that rates will stay at these levels until economic activity picks up again.

 

Snapshot Q&A:

 

Q: Why did the Fed lower rates and will they go to negative? A: The Fed lowered rates in order to ease the banking system to enable it to effectively lend to companies and consumers during what is expected to be two challenging quarters.  Rates are not expected to be negative as the Chairman said that it was not part of their current policy thinking.

Q: What does it mean to grow the balance sheet?  A: It simply means that the Fed will purchase bonds in the open market to support the bond markets and add liquidity.  They announced that they will purchase an additional $500 million in treasuries and $200 million in mortgage backed securities.  This type of open market purchasing is similar to the quantitative easing, or QE, conducted in the wake of the financial crisis.

Q: Is the Fed out of ammo?  A: No, the Fed has plenty more tools to provide monetary stimulus include further and more directed bond purchases.  They do not have the authority to purchase equities, though they can get it if necessary.

Q:  What about Fiscal Stimulus? A: Fiscal stimulus will be critical at this stage to ensure a smooth transition through the next few quarters of reduced growth.  The President’s declaration of National Emergency under the Stafford Act enables his administration broader ability to act in this health crisis.  His announcement of halting interest of Federally held student loans, and purchasing crude oil for the national reserve are two notable policy moves.  We can expect more as the pandemic progresses.  Congress for its part approved $8+ billion in spending two weeks ago and is working on an additional package which has passed the House and will be taken up by the Senate as early as today.

Q: Will the US go into recession? A:  It is too early to say, but the probability has certainly increased.  Currently many believe that a recession, if any, would be short lived and not severe.  A technical recession is two consecutive quarters of negative GDP growth.

Q:  Why did the stock market futures go down when the Fed has been so aggressive?  A: The fall is less likely attributed to disappointment in the Fed and more likely the result of the virus news over the weekend and the fact that Fed felt the need to get aggressive two days prior to its scheduled meeting.  Additionally, the Fed acted in cooperation with other central banks this weekend,

Q:  Should I buy stocks here?  A: With so much volatility and uncertainty, now may not be the best time to try to pick the bottom.  A safer approach would be to wait for better clarity and a reduction in volatility.  Buying would be wiser once the market bottoms and starts to build a base.  Leaving a few dollars on the table is better than risking further losses.

Q:  Should I sell stocks here?  A: No. Panic selling at these levels is not a good policy.  If you have a long-term investment strategy, you will be fine as the probability for success is in your favor.  Now is the time to re-examine your portfolio risk and assess whether or not it still fits your goals.  When volatility calms down, changes can be made to reduce your portfolio risk and and trim some of the holdings which may not perform well going forward.  Speak to your advisor for assistance.

Q:  How far can this go?  A: With the VIX volatility index closing at 57 on Friday, we can expect markets to swing up or down 16% within the next month.  The VIX is based on implied volatilities of options used to hedge S&P500 futures.

 

NXT UP

 

– Plenty of economic data in the week ahead.  Bear in mind that most of the numbers we have been getting and will get have not yet factored in the economic slowdown brought on by reduced travel and entertainment.  See the attached calendar of weekly economic and earnings releases for details.

– There will be lots to unpack in the days ahead as local and Federal officials increasingly restrict activity.  We will be here to get you information in a timely manner.

 

daily chartbook 2020-03-16

econ numbers 3_16

earnings releases 3_16

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