Historic Volatility as COVID 19 Panic Suspends Business
It was a historic week on Wall Street that investors will not soon forget. The week started with a crash in oil prices. It also produced two 15 minute trading halts on US equity exchanges, the shut down of all major sporting events, the closure of school districts, the cancellation of flights between the US and Europe, liquidity injections by the global central banks, a declaration of a state of emergency by President Trump, and the announcement of a relief package agreed upon by both sides of the aisle in Congress. The week saw extreme volatility, which broke down usual correlations between asset classes, which in turn created even more volatility. For the week the S&P 500 lost 8.8%, the Dow shed 10.4%, the Nasdaq tumbled 8.2%, and the Russell 2000 took a beating losing 17.9%. Safe-haven assets were also extremely volatile and provided less cover than one might expect. The 10-year bond yield traded to an all-time low of 40 basis points but ended the week 27 basis points higher, closing at 0.98%. The 2-year yield increased four basis points for the week, closing at 0.53%. Gold fell $157 or 9%, to close at $1516.20 an Oz. Oil lost just over $10 or 25%, to close at $31.85 a barrel. There were several changes to our models last week. We sold out of our Emerging Markets exposure and our High Yield bond position and placed those proceeds to cash. Additionally, we moved out of our position in Financials and used those proceeds to move into the Communication Services Sector.
The week started with news that OPEC had failed to reach an agreement on production cuts. The news prompted Saudi Arabia to cut prices and a mandate to increase its production dramatically. The decision induced widespread selling in risk assets and caused the US equity exchanges to halt trading for 15 minutes when the cash market for the S&P 500 breached the down 7% mark. These circuit breakers are in place to provide time for investors to reassess the situation and curb panic selling. There are three levels of circuit breakers set on the cash market for the S&P 500, the first is down 7% when trading is halted for 15 minutes, the second is down 13% when trading is again halted for 15 minutes, and the third which is down 20% when trading is halted for the day. Of note, the Futures market has similar circuit breakers in place.
The rapid spread of the Coronavirus has prompted governments, private sector corporations, schools, and religious organizations to take action to curb the spread. President Trump announced travel bans on flights from Europe. The NBA, NHL, MLB, and the NCAA have suspended play and or canceled games. Schools around the country have also announced closures, and some states have now closed restaurants and bars.
These closures are having an enormous impact on the economy and will likely cause Q1 GDP to be flat. Wall Street estimates for the second-quarter GDP range from down 2% to down 5%. The slow down has induced global central banks to add massive liquidity into the markets. Coordinated efforts from the US Federal Reserve, the Bank of England, the Bank of Japan, Bank of Canada, and the ECB aims at keeping the financial system liquid. The Fed announced on Sunday night that they would take their policy rate range to zero to 0.25%. They also announced that they would be buying 500 billion in US Treasuries and an additional 200 billion in US agency paper. Additionally, the Fed took bank reserve requirements to zero and extended terms on loans to banks to 90 days. US dollar swap line costs between central banks were also reduced.
The monumental moves taken by the global central banks will need help from global governments on the fiscal side to stimulate the economy. On Friday, President Trump announced a state of emergency, which will allow 50 billion in spending. Additionally, the President announced that interest on student loans would be waived and that the US would open the Strategic Petroleum Reserve. The House also introduced a coronavirus relief bill that would strengthen unemployment insurance, offer two weeks paid sick leave, offer free virus testing, and increase funding to aid children’s meals that usually are served at school.
There are a lot of unknown variables right now, and markets do not like uncertainty. Actions being taken on multiple fronts are aimed at curbing the spread of the Coronavirus and to cushion the effects it is having on humanity and the global economy. We have been proactive in our models and will continue to be diligent in our efforts to manage risk in these unprecedented times. Please let us know if you have any questions or concerns.
