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Markets Sell Off Despite New Fed Stimulus

By: Craig Fehr, CFA March 16, 2020

The U.S. Federal Reserve (the Fed) offers additional stimulus – The Fed cut rates by a full 1% over the weekend, returning its policy rate back to near zero where it last was during and after the financial crisis. In addition, it will restart its bond-buying program (quantitative easing) to inject $700 billion of new stimulus alongside new measures to make it easier and cheaper for banks to access funding directly from the central bank.

The Fed is only part of the equation – This situation has evolved quickly, and we give the Fed credit for acting swiftly and proactively to provide financial support to the economy. However, unlike the financial crisis and other traditional economic slowdowns, Fed stimulus won't be the primary cure. In our view, the Fed's response is necessary to maintain a well-functioning financial system and ensure banks have liquidity and businesses have access to the credit they'll need to weather this storm. So while this new monetary policy stimulus is a necessary piece of the puzzle, we view it as a requisite complement to the fiscal policy (government support through tax adjustments, spending programs and financial aid) that will be required to bridge the gap for consumers and businesses until the containment and social-distancing impacts fade.

Volatility likely to persist, but policy actions help pave an eventual rebound – We'd attribute Monday's sharp decline to the combination of:

  1. Incoming news that the virus is still on its ascent
  2. The growing realization that containment efforts will increase
  3. Concerns that the Fed has now fired the bulk of its monetary-policy ammunition

Fed policy is back at financial-crisis settings, but it should be noted that this is not the financial crisis, it is a health crisis. That is of little consolation to the market for now, as the impact of "social distancing" on consumption and investment is likely to shock the economy into a temporary but notable recession. Extraordinary monetary and fiscal policy are necessary, but at the end of the day, it will be the medical progress that will dictate the timeline for a reduction in market volatility and the ultimate rebound in stocks. We expect daily volatility to persist until new virus cases begin to curtail, but we think investors should find optimism in the fact that:

  • Volatility will continue in the near term, with stocks down 27% from mid-February; however, the market declines already reflect a recessionary outcome and make a case that the bulk of the stock market's decline may have been endured;
  • This won't last indefinitely, and when the virus containment procedures subside, there's a compelling case for a vigorous economic rebound. We believe the Fed's recent actions will add significant octane to that rebound when the fog lifts; and
  • Stocks are at their most compelling values in more than a decade. This won't turn around immediately, but history has proven short-term volatility pain has been long-term investors' gain*

Source: Morningstar, FRED, Edward Jones calculations, Dow Jones Industrial Average (DJIA). The DJIA is an unmanaged index and cannot be invested into directly.

Market Stats

1 Day
1 Year
S&P 500
Int'l Stocks
U.S. Bonds
10-Yr Rate

Sources: S&P 500 Index; international stocks – MSCI EAFE Index; U.S. bonds – Bloomberg Barclays U.S. Agg; 10-year rate – U.S. 10-year Treasuries. Market Stats: price return for S&P 500 Index and MSCI ACWI-ex. US.

Our Views:

  • We expect volatility to continue amid uncertainty over the coronavirus and containment efforts.
  • We think the economy and corporate profits will endure a material but temporary downturn.
  • Interest rates have fallen to historic lows and are likely to remain low for an extended period given Fed stimulus and low inflation.

Our Guidance:

  • Stay calm and make decisions that are aligned with long-term goals, not current headlines. A long-term perspective is, in our view, an effective tool in navigating market pullbacks.
  • Rebalance portfolios, trimming overweight allocations and filling gaps in underrepresented asset classes and sectors.
  • Take advantage of the ongoing volatility by systematically investing at regular intervals, reducing the "timing" aspect as the sell-off plays out.

Important Information:

*Past performance is not a guarantee of future results.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuate, and investors can lose some or all of their principal.

An index is not managed and is unavailable for direct investments.

Systematic investing does not guarantee a profit or protect against loss in declining markets.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

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