Stocks edged higher last week, as the S&P 500 rose by 0.61 percent to 2,972.37. That left the benchmark index down 8.00 percent 2020-to-date, and 12.22 percent below the record close hit just two weeks ago. Despite the spike in daily volatility, the actual damage done so far remains in line with historical norms. For example, the peak-to-trough decline for the S&P 500 as of this writing is 12.76 percent (closing basis), a full percentage point below the average since 1980. Helping equities avoid a larger max drawdown last week was a combination of solid economic data and somewhat coordinated policy easing. The former suggests that the U.S. economy started 2020 on a strong footing that may help soften the blow from of any coronavirus-related supply and demand disruptions, while the latter is a sign that central banks are ready to act quickly in order to stave off a global recession. Focusing on domestic policy actions, the Federal Reserve on Tuesday cut the target range for the Fed funds rate by 50 basis points to 1.00-1.25 percent. The decision for a rare inter-meeting cut was unanimously supported by all ten voting FOMC members even as the committee also stressed that “fundamentals of the U.S. economy remain strong.” Put simply, the positive spillovers from rate cuts can take time to filter through the economic system, so the Fed would rather move now than wait for a confirmation in the data that could take months to show up.
If the outbreak is soon contained and the preemptive easing appears to have been unnecessary then officials can gradually reverse last week’s cut, although current market pricing actually implies a 100 percent chance of another 50 basis points in easing occurring later this month. There are disagreements about how effective such policy moves can even be in this situation but the hope is that lower short-term rates reduce the interest expense of U.S. companies, particularly small businesses, and therefore take some pressure off cash flows and in turn potentially lessen the need to lay off workers as a cost cutting measure should the epidemic worsen. Lower rates can also help put more money in consumers’ pockets (via refinancing) and more generally ease financial conditions here in the U.S. (remove potential frictions). An argument can still be made, though, that a fiscal policy response may be needed as well, and fortunately Congress has already approved roughly $8 billion in emergency funding to help combat the virus. Larger measures, such as a potential payroll tax cut, have also been proposed, but conditions may need to deteriorate further in order to obtain bipartisan support. Altogether, policymakers have taken some constructive steps recently but the inability for equities to hold onto gains last week could be a sign that the markets want substantially more accommodation, both monetary and fiscal, sooner rather than later. Given the high degree of uncertainty still surrounding this situation, it is easy to see downside and upside volatility staying elevated in the near-term. Any regular investors unsure how to navigate this environment should consider consulting with a professional financial advisor and as always, we are here to help with any questions you may have.
To recap a few of the things we learned about the economy last week, the positives included that refinance applications surged, construction spending jumped, corporate layoff announcements fell, initial jobless claims slid, nonfarm payrolls growth firmed, wage gains picked up, and the unemployment rate in America fell back to a roughly half-century low. As for the negatives, productivity growth was revised slightly lower, and gauges of manufacturing and service sector activity sent mixed signals as early evidence of potential coronavirus disruptions started to show up. This week the pace of economic data slows down but there are still a few important reports on small business, consumers, and inflation scheduled to be released.
What To Watch:
- Nothing significant
- MBA Mortgage Applications 7:00 AM ET
- CPI 8:30 AM ET
- Atlanta Fed Business Inflation Expectations 10:00 AM ET
- EIA Petroleum Status Report 10:30 AM ET
- 10-Yr Note Auction 1:00 PM ET
- Jobless Claims 8:30 AM ET
- PPI-FD 8:30 AM ET
- Quarterly Services Survey 10:00 AM ET
- EIA Natural Gas Report 10:30 AM ET
- 10-Yr TIPS Announcement 11:00 AM ET
- 30-Yr Bond Auction 1:00 PM ET
- Import and Export Prices 8:30 AM ET
- Consumer Sentiment 10:00 AM ET
- Baker-Hughes Rig Count 1:00 PM ET
Sources: Econoday, FRBSL
Post author: Charles Couch