Market Update: Changes in the Narrative!?
By: J. Reed Murphy, CIO and Rob Young, CFA
The equity markets had another rocky week. Thursday’s significant sell-off tested the nerves of many. However, we witnessed a massive rally at the end of the day (Friday) to bring the S&P 500 and Dow Jones Industrial Average indices to both close over 9% for the day. We want to provide a brief note going into the weekend.
What Happened Thursday?
The S&P 500 declined by 9.5% (in one day), which brought it’s year-to-date return down to a negative 22.9%. A bear market decline is defined as a decline from a recent high to low of over 20%. The S&P 500 has slid into bear market territory as did the Dow Jones Industrial Average (DJIA). The market continues to assess the economic impact of Covid-19 (aka Coronavirus) and the new oil price war initiated by Russia and Saudi Arabia.
What is particularly remarkable is the speed at which we hit a bear market. It only took 19 days for the DJIA to hit this level – an all-time record. This pace surpassed the 37 days of the Great Depression in 1929 and the 38 days occurring around Black Monday in 1987. What this tells us is the increased use of index funds, mathematical program traders, and the pace at which news travels today creates more severe moves. It contributes to panics.
Source: LPL Research, Factset 3/11/20
A bear market is when a stock index or security closes 20% or more below the 52-week high
All indexes are unmanaged and cannot be invested into directly. Past Performance is no guarantee of future results
Dow Jones Industrial Average is represented by the Dow Jones Industrial Average Index
Recent Monetary Policy Announcements
While the U.S. Federal Reserve did recently cut Fed Funds rates by 50 bps and is expected to do the same again soon, those policies really can’t fix the problem if commerce stalls due to lock-downs and a change in life patterns (e.g., school closings, professional sport seasons postponed). However, if those monetary policies can ensure the markets that there is plenty of liquidity and the operational plumbing of the markets is secure, then that helps.
That is what the NY Fed did yesterday by providing a massive infusion of capital for purchases of bonds and to support the repo market. The market popped up midday when this was announced. However, the lack of clarity of U.S. fiscal policies sent the market lower. A similar fiscal policy response out of the European Central Bank (ECB) also fell flat, which contributed to a similar drop in European markets.
Enter Fiscal Policies – Friday’s Changing Narrative
While governments had really ramped up fiscal policy announcements in recent days in response to Covid-19, the market wasn’t impressed with the lack of clarity, particularly in the U.S. However, fiscal stimulus hit another gear today (Friday). Without providing a long list of fiscal policy announcements, here are a few highlights.
- European Union (EU) – Has suggested EU member countries have been granted leniency in their budget criteria for membership; triggering fiscal support.
- Germany – Being the most economically powerful EU member, German officials now appear on the same page. Their Finance Minister said “there will be no limit to the money available” for companies. This suggests small businesses will have access to all the money they need to get through this Covid-19 period. Their fiscal spending plan is estimated to be 500B Euros. That is larger than current U.S. proposals on a smaller economy.
- United Kingdom (Britain) – They similarly announced a 600 Billion Euro plan, which is similarly larger than U.S. proposals. The UK has done a nice job of having coordinated fiscal and monetary policies.
This brings us to the United States. Treasury Secretary, Steve Mnuchin, and House Speaker, Nancy Pelosi, announced an agreement on a variety of measures. These are smart targeted efforts to help with healthcare issues and impacted citizens. These moves include free testing for all, 14 days of paid sick leave, three months of paid family and medical leave, expansion of unemployment insurance and food stamp programs, and a bump in Medicaid-matching. President Trump also invoked the Stafford Act and other disaster declaration requests that could free up more than $42 billion in funding for states available in the Disaster Relief Fund. According to Bloomberg, an emergency declaration would allow a state to request a 75% federal cost-share for expenses that include emergency workers, medical tests, medical supplies, vaccinations, security medical facilities, and more.
Market Reactions on Friday
Equity markets opened up significantly higher on Friday morning, likely in response to many of these news items. However, they slipped from early highs later in the day. The apparent reason being in the United States is that these fiscal moves lack a shock-and-awe fiscal stimulus program. While these first moves are good, Speaker Pelosi and others have suggested that more fiscal stimulus could be on the way.
We view these events as positive. We also believe that markets will continue to bounce around as the impact of closings, social distancing, and a likely (and significant) ramp-up in U.S. Covid-19 cases evolves. However, if other countries can serve as a road-map, cases will eventually fall, normalcy will pick-up and markets will see through to the other side.
We understand that these are very trying circumstances that are affecting individuals with anxiety due to uncertainty around the future. Because of this, we take it as our personal mission to work continuously and with measured caution to monitor situations and respond to facts and not fear. And, continue to provide you updates as we move forward.