March 16, 2020
QE & ZIRP No Cure for Coronavirus
Sunday Fed Intervention
Dow Down 3000 Points…13% Drop
It was a late Sunday surprise. Reminded me of the Sunday announcement of Lehman Brother’s bankruptcy in September of 2008. This time, yesterday, the Federal Reserve released an emergency rate cut. The central bank slashed rates to essentially zero and announced a $700 billion quantitative easing program. The Fed is back to its “ZIRP” (Zero Intererst Rate Policy) and “QE” game plan to save the economy. It worked well in 2008 and 2009 to combat the financial crisis. However, the way the market reacted to yesterday’s news suggests there is doubt in these monetary stimulus programs this time. Instead of spurring stock purchases, the Dow plunged more than 2,700 points in the first minutes of today’s market open. That triggered another trading halt. Today’s “circuit breakers” halted trading for 15 minutes. This was the third market stoppage in the last six trading days.
The coronavirus is spreading worldwide, and the global economic impact of the pandemic has caused a stock market crash. The stock market is reacting violently to the news and panic appears to be setting in (see graphic below). Confirmed coronavirus cases in the U.S. have now topped 4,100, with 72 deaths. Worldwide, the number has risen to 179,650 with more than 7,000 deaths. Parts of the U.S. were in lockdown Monday, with schools, restaurants and gyms closing to try to slow the Covid-19 spread. The country is now doing all it takes to “flatten the curve.”
There was nothing positive about today’s massive market move down. My analysis shows the Dow now back to where it was in February of 2017. So, the Dow index has lost in a month what it took three years to gain. The market is pricing in a recession. Behavior, as would be expected, is fearful. As the fear gauge below indicates, fear is at an extreme level:
Today’s fall was startling. Nearly 3,000 companies on both the Nasdaq and the NYSE notched 52-week or all-time lows. Not one stock notched a 52-week high today. Of the 197 industry groups I monitor, only 1 was up today. Today’s selling accelerated into the close to take out previous lows. The Dow is now 30% below its February high.
Here’s today’s scorecard:
As the table below shows, today’s point loss was the biggest in history. The table on the right shows today’s percentage loss was the most in a day since October 19, 1987.
“Markets can remain irrational longer than you can remain solvent,” is a famous stock market quote from John Maynard Keynes. We must remain rational in irrational times. Remaining solvent is beneficial when the stock market has a 30%-off sale. I heard “cash is king” a lot after the crash of 1987. I am starting to hear that again.
Hope this is helpful.
Thank you for your continued trust and confidence. I remain vigilant as I manage and oversee your investment account.
John