By Nicholas
Jasinski | Monday, March 16
Vol. Stocks and other risky
assets across the globe tumbled today, as the disruption to daily life as a
result of the growing coronavirus outbreak became very real for many more
people. Many of you reading this may be affected. Barron's has gone to full work-from-home mode, as have
hundreds of other businesses that have the ability to do so.
Speaking this
afternoon, President Donald Trump and members of the White House’s coronavirus
task force asked all Americans to avoid discretionary travel, to not hold
gatherings of more than 10 people, to not eat at restaurants or bars, and
to quarantine themselves if they or a member of their household feels sick.
The measures
follow similar recommendations made by several states and local governments in
recent days, which have also been closing schools and working to prepare hospitals
for a potential surge of patients needing care.
Italy, Spain,
and France are in lockdown. And global commerce is grinding to a halt, with new
countries announcing travel restrictions daily.
There's no
doubt that there will be major negative consequences for economic activity and
corporate earnings—and the market has moved with lightning speed to price in
that new reality as it has sunk in.
Two of the
five steepest U.S. market drops in history have happened in the past three
trading days. The Dow Jones
Industrial Average's 2,997-point, or
12.9%, drop today ranks second-worst in the index's history, only behind 1987’s
Black Monday crash, when the index dropped 22.6%. In third and fourth place are
Oct. 28 and Oct. 29, 1929—the worst two days of the Great Crash of 1929. In
fifth is last Thursday's 9.99% tumble.
The S&P
500 also
had an ugly day, down 12%, while the Nasdaq
Composite plummeted 12.3%.
Central banks
across the globe are pumping monetary stimulus into their economies at a rate
they haven't come close to since the financial crisis over a decade ago.
The U.S. Federal
Reserve lowered
its benchmark interest rate at an emergency meeting for the second time in as
many weeks on Sunday, to close to zero. It also announced sweeping moves
to stimulate lending and shore up liquidity in Treasury and money markets,
including vast new bond purchases of at least $700 billion. The Bank of Japan, People's
Bank of China, Bank
of Canada, European
Central Bank, and Bank
of England have all lowered interest rates or stepped up
asset purchases in recent days.
The moves are
first and foremost important for maintaining orderly markets.
Lending markets that companies and banks rely on to meet their short-term
funding requirements had been showing signs of stress in recent days, prompting
the Fed's surprise move just days before a regularly scheduled meeting.
"We'll
see if all of the Fed's moves start to relieve some of the funding
pressures," says Marvin Loh, State
Street's senior global macro strategist. "I
think we need to start there to be able to figure out where assets are supposed
to be valued. The machine has to work or else nobody feels comfortable with
putting a price on any stock or any bond."
The jury's
still out on whether central banks' moves will address recent day's liquidity
issues, or whether companies will continue to hoard cash. But it's a strong
start, and demonstrates the Fed's ability to move quickly and decisively to
respond to the market conditions it's observing.
The same can't
yet be said about the U.S.'s fiscal policy makers, who now have the spotlight
and the ability to borrow while paying practically no interest.
Loh would like
to see targeted measures to provide relief to workers most affected by not
being able to work as long as social distancing remains the recommendation.
"Ultimately
that will also allow activity to bounce back faster after the coronavirus
outbreak has passed," Loh says.
In the meantime, continued
market volatility is a safe bet. It will take time for the Fed's latest
measures to kick in, and even longer for investors to figure out how
long the virus' disruption may eventually last. More on that below.
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