Last week provided much-needed financial and psychic relief for investors pummeled by a stock market that lost almost a third of its value in a mere 22 trading days between February 19 and March 23. As if to demonstrate that volatility occurs on the upside as well as the downside, the S&P 500 rallied almost 17% from Tuesday morning, March 24, through Thursday’s close, before giving back some of those gains on Friday. The mid-week surge left the index up 5% for the week, the first positive week in March. Even before the week was out, market analysts were wondering out loud whether the market had found a bottom, and whether the worst of the financial carnage was behind us.
News flow last week offered plenty of fodder for optimism. The Federal Reserve added to its growing list of market support by establishing Primary and Secondary Market Corporate Credit Facilities to backstop corporate bonds and bond ETFs, followed in short order by a Term Asset-Backed Securities Loan Facility to boost liquidity for a long list of securities, including student, credit card and auto loans. The New York Fed offered $115 billion of repurchases last week. As large as this figure is, repo activity last week was down from close to $500 billion in each of the previous two weeks, evidence that panic in fixed income markets is subsiding.
In the glare of the public spotlight, Congress spent the week arguing about a comprehensive fiscal rescue package designed to support small businesses and the labor market until restrictions on movement can be lifted and economic activity can return to normal. President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, on Friday afternoon. We will have more analysis on the implications of this act for investors and business owners in the days and weeks to come, but markets welcomed government action even before digesting the details.
So, is this it? Have markets fully priced in what uncertainty remains? We are not in the business of predicting market bottoms (or tops, for that matter), but it seems premature to declare the end of market volatility. History shows that bear markets are often punctuated by sharp rallies and that these rallies occur in close proximity to steep declines. The nearby bar graph illustrates the 10 worst and 10 best trading days in the S&P 500’s history, stretching back to 1928. To put the current market into context, note that two of the 10 worst days in the history of the index happened in March 2020, along with one of the 10 best days. All three of those days occurred within a week-and-a-half stretch.
This clustering of volatility is not unique. Half of the data points on the combined analysis took place during the Great Depression, with another four days clustered amid the global financial crisis. Volatility loves company.
Although the particulars of every crisis are unique, the common thread in them all is the immutability of human emotions. Markets are nothing more than the intersection of fear, panic, hope and desire, which is why history offers a good guide, if not a precise prediction, as to what may happen going forward. A quick glance at the 2008-09 crisis indicates that we may have further to go.
In 2008, the Federal Reserve cut policy rates to zero and introduced lending facilities as early as March 2008. As the crisis deepened, Congress passed the Emergency Economic Stabilization Act of 2008 on October 3 of that year, creating the $700 billion Troubled Asset Relief Program (TARP) to support the banking sector and financial markets. Markets rallied in response to this support, rising 19% in eight days from October 27 through November 4, only to fall back 25% over the next few weeks. A Thanksgiving rally pushed prices up 19% again through the end of November, after which prices fell another 24% before finally reaching a bottom in March 2009. The recovery in real economic activity did not get underway until June 2009.
The point of this quick trip down memory lane is not to argue that the future will follow the path of the last crisis, but rather to observe that it takes time for policy to have an effect, and even more time for economic dislocations to heal. In the days and weeks that follow, the timeframe for bringing social distancing and voluntary isolation to an end will become clearer, hopefully without undue burden on a healthcare system already stretched to a breaking point. For investors and business owners, the next question is the uncertain path and pace of the economic “reboot.” We see in that consideration a likely source of future volatility.
Financial markets are discounting mechanisms, and, as such, they will anticipate a return to economic normality before it happens. Our analysts and portfolio managers are taking advantage of price volatility on a security-by-security basis throughout this period of market uncertainty, seeking to exploit the difference between price and value that volatility creates. Volatility is a two-way street, although up days certainly feel better than down days. We expect there will continue to be plenty of both.
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