Crisis Market Diary: A Decade-Week

Snip20200321_11As the saying goes (often falsely attributed to Lenin), there are decades where nothing happens, and there are weeks where decades happen. We just lived through one of those decade-weeks. It “was a week of escalation. Of the coronavirus and the countermeasures. Of the economic hit and the policy response. Of investor fear and market stress. In the space of six days, warning lights flashed in the deepest recesses of global markets, a decade’s worth of monetary action, and a scramble for liquid assets surpassing any that went before.”

Here’s how the 11-year bull market unraveled.

The Federal Reserve, in conjunction with central banks around the world, took drastic action Sunday night — the kind of action not seen since the global financial crisis, the whole 2008 arsenal — to try to prevent coronavirus from devastating the economy. The Fed slashed interest rates to near zero, announced a $700 billion bond-buying program, and relaxed bank capital regulations to encourage further lending. Most economists expect a “major recession,” according to a survey by the University of Chicago. Goldman Sachs sees U.S. GDP shrinking 5 percent in the second quarter after zero growth in the first three months. The problem, as economist Larry Summers eloquently put it, is that “economic time has been stopped, but financial time has not been stopped.” And, as the former Fed governor Kevin Warsh explained, “If you’ve seen one financial crisis, you’ve seen one financial crisis.” Small-business confidence in the U.S. plunged in March to near its lowest levels in the past seven years, as business owners grappled with the effects of the novel coronavirus on their companies and the broader economy. FactSet found that stock valuations have dropped below long-term averages.

On Monday, despite the Fed’s aggressive action on Sunday, U.S. markets went deep red, shredding roughly 12 percent from the S&P 500 and Nasdaq indexes. The Dow lost nearly 13 percent. All major U.S. indexes moved into bear market territory, with the S&P 500 and Nasdaq shredding more than 25 percent off their February highs, and the Dow Jones Industrial Average down 28 percent. The yield on the benchmark 10-year U.S. Treasury note dropped to 0.724 percent. U.S. crude-oil prices slid below $30 a barrel. The VIX reached its third highest level ever and closed above 82.

On Tuesday, U.S. stocks rebounded strongly, foreign stocks less strongly, and U.S. Treasuries declined after the biggest rout in stocks since 1987 on Monday and as the U.S. government stepped up its efforts to offset the financial damage caused by the coronavirus. The S&P 500 closed up almost 6 percent after trading in the red earlier in the day, continuing a streak of volatility last seen during the Great Depression. The day’s most remarkable market event was the 34-basis point rise in the 10-year U.S. Treasury yield, probably the world’s most important financial benchmark. That was its biggest one-day move since the summer of 1987, when the 10T yield started as high as 8 percent.

Also on Tuesday, the Federal Reserve announced it is reactivating a program last used during the Great Financial Crisis to support commercial paper issued by companies — essentially to ensure that scarcity of short-term funding doesn’t force some large company to fail to meet payroll, and take the current crisis to another level. The day also brought headlines that the administration was looking for a fiscal stimulus package with a total price label of $850 billion. That was almost the exact amount that Congress eventually voted for in 2009. By the end of the day, news came that the Treasury Secretary was looking for more like $1.25 trillion. Helicopter money could be here at last. The New York Times reported on a 103-page HHS response plan, dated the previous week, that said the pandemic “will last 18 months or longer” and could include “multiple waves.”

On Wednesday, it finally became expensive to be rich. Investors began paying for the privilege of getting their money back as rates on 4-week U.S. Treasury bills and then 3-month bills went negative. Pretty much everything else got sold and all of the stock market’s gains since President Trump took office have been erased. Stocks around the world took significant hits and the S&P 500 lost more than 5 percent as a rush for cash shook the financial system while companies and investors hunkered down for a prolonged economic stall, taking the recent market turmoil into a new, more troubling liquidation phase. In debt markets, the sell-everything approach drove down prices of investment grade bonds and government debt alongside stocks and commodities of nearly all stripes. Since 1990, there have been 56 trading days when the S&P 500 has posted an intraday range of more than 5 percent. We’ve seen seven of those this year, and five in a row ending Wednesday (Friday made eight).

U.S. crude prices plunged to their lowest levels in 18 years, as governments tightened travel restrictions across the world and the continuing Saudi-Russian price war showed no signs of abating. After the markets closed for the day, President Trump signed a $100 billion coronavirus aid package into law which includes provisions for emergency paid leave for workers as well as free testing. Congress is working on a massive stimulus package to pass to try to avoid economic calamity from the outbreak. Detroit’s three automakers – General Motors, Ford, and Fiat Chrysler – temporarily closed factories. Across the Atlantic, the European Central Bank unveiled a new €750 billion ($818.7 billion) bond-buying program aimed at shielding the eurozone economy. Here at home, the Federal Reserve announced it would launch a new lending facility to backstop the money-market mutual-fund sector. “I view it as … [I’m] a wartime president,” Mr. Trump said. “I mean, that’s what we’re fighting.”

The big news Thursday was that Tulsi Gabbard suspended her presidential campaign. People are losing their jobs — through layoffs, furloughs, cut shifts or whichever term you want to use — at an increasingly rapid pace, showing why the global economic picture is suddenly so dire. IHS Markit predicts that the U.S. unemployment rate could rise to 6 percent by mid-2021. The former Trump economic adviser Kevin Hassett estimated that job losses in the U.S. could top one million in March alone. And Treasury Secretary Steven Mnuchin warned that without a strong government response, the jobless rate could eventually soar to 20 percent of the labor force. The Labor Department announced a sharp rise in jobless claims last week. Several states have already recorded dramatic spikes in applications for unemployment insurance and the widespread shutdown of much of the service industry has only just begun. Scores of retail chains are shutting their stores. The White House is considering long-term bonds – as long as 50 years – to finance needed stimulus.

U.S. oil prices rebounded from their lowest level in 18 years Wednesday with their largest one-day percentage gain on record, gaining 24 percent on Thursday. Domestic stocks ticked higher after various central banks deployed a flurry of emergency measures to try to buffer the global economy from fallout stemming from the coronavirus pandemic. After moving at least 4 percent one way or the other for a record eight straight sessions, the S&P 500 advanced 0.5 percent on Thursday. The Dow gained 1 percent and the Nasdaq added 2.3 percent, boosted by a rally in shares of tech companies. In just one month, the S&P 500 dropped more than 30 percent. Eight days ago, the long-bond (30-year U.S. Treasury bond) yielded 0.99 percent, breeching one percent for the first time ever. Thursday, it yielded 1.85 percent; the price loss over those eight days exceeded 31 percent. At the stroke of midnight Thursday night/Friday morning, California put its 40 million residents on lockdown, the first state to do so. The proposed Phase 3 stimulus package, calling for cash paid to every American (including children) who earned less than $99,000 per year, was released.

On Friday, New York ordered all non-essential workers to stay home. So far, about 18 percent of American workers have been laid off or had their hours reduced because of coronavirus as the crisis is affecting 25 percent of those who make under $50,000 a year and 14 percent of those making more than $50,000. Tax Day was officially moved to July 15. The Fed announced it will conduct $1 trillion in daily repo for rest of March. Treasury Secretary Mnuchin and Senate Democrats were pushing to expand the Senate GOP’s “Phase 3” economic rescue plan in emergency talks Friday, with all sides under pressure to reach a deal by the end of the day.

Domestic stocks ended Friday’s session lower in the worst weekly performance for all three major stock indexes since October 2008, during the Great Financial Crisis. The Dow closed 4.6 percent lower, dropping 17.3 percent last week. The S&P 500 finished down 4.3 percent and fell 15 percent for the week. The Nasdaq Composite slipped 3.8 percent, for a 12.6 percent loss last week. All three indexes are down about 30 percent from their mid-February records. The 10-year U.S. Treasury yield fell back below 1 percent. The 10T yield continued to fluctuate in a broad range, moving from under 0.70 percent on Monday to just above 1.25 percent on Thursday before dropping to 0.92 percent on Friday. Investors withdrew an unprecedented $35.6 billion from U.S. investment-grade bond funds last week. Astonishingly, the previous record was $7.27 billion, set one week earlier. West Texas Intermediate crude fell 11 percent to $22.43 a barrel, down 29 percent for the week. Gold edged higher.

European equities posted losses last week, as countries imposed lockdowns and economies faltered, raising the prospect of a prolonged recession. However, a flood of fiscal stimulus and further interest rate cuts helped equities limit losses by the end of the week. For the week, the pan-European STOXX Europe 600 fell 1.85 percent, Germany’s DAX slipped 3.56 percent, France’s CAC-40 declined 2.51 percent, Italy’s FTSE MIB dropped 0.4 percent, and the UK’s FTSE 100 slid 2.78 percent.

In Asia, China equity markets fell also last week. The Shanghai Composite dropped by nearly 5 percent, while the large-cap CSI 300 lost 6.2 percent. Japanese stocks produced mixed returns last week. The Nikkei 225 declined 5.0 percent and is down 30 percent YTD, while the large-cap TOPIX and the TOPIX Small posted gains for the week but are down 25.5 percent and 29.5 percent, respectively, in 2020.


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