In the last few weeks, financial markets have seen some of the most substantial losses and gains for a single trading day in modern history. Much of this movement has been a result of the arrival of the novel coronavirus, or Covid-19, in the U.S. However, the selloff was exacerbated several weeks ago when major oil producers failed to agree on limiting oil production. What followed was an oil price war that plunged oil prices and further riled markets. As such, we saw broad stock market indexes like the Dow Jones Industrial Average and S&P 500 drop more than 30% from their recent highs. Since then, we’ve seen some recovery this last week as markets responded to the anticipated passage of a stimulus bill that would put cash in the hands of low and middle-income Americans. As of this writing, that bill has passed the Senate, and the House will likely pass it sometime in the next 24 hours.
You may have also seen the news about how the Federal Reserve is working to help buffer the economic fallout. Where Congress is responsible for fiscal policy – what they’re enacting with the stimulus bill, the Federal Reserve can enact what’s known as monetary policy. You may have read in the past about the Federal Reserve lowering and raising rates and that movement being positive or negative for the economy. The Federal Reserve’s mandate has to do with managing inflation and unemployment by assisting with things like lending availability and liquidity in major banks. Recently, the Fed lowered the federal funds rate back to zero in an attempt to make money cheaper for banks to borrow and ultimately cheaper for individuals to borrow. Like the stimulus bill, this is also positive news and was further bolstered by the announcement that the Fed will begin purchasing additional securities in the future to increase liquidity in the marketplace by being buyers of funds that others are trying to sell in spaces with limited demand.
Looking forward, we expect more market volatility in the days to come. There are several reasons for this, the first being that depending on how long shelter-in-place orders stay in place, more stimulus may be needed. In healthy environments, markets move in anticipation of an event more than the event itself, which is why we’re seeing markets respond to the potential passage of a stimulus bill before the bill itself is actually passed. What it also means is that as more information is made available about what sort of timeline we can expect for staying home, the market will continue to move in response to expectations for reduced productivity and lower rates of employment.
Of course, these aren’t normal times, so we also can’t entirely expect normal market behavior to prevail. In times of uncertainty, emotions like fear and anxiety can also affect market movement. Investors trading on those emotions tend to exacerbate market movement in both directions, driving losses lower and gains higher than the underlying data would justify. As tempting as it is to get drawn into the herd mentality, trading in and out of the market is not only costly but difficult to time and execute. Instead, now is the time to rely on the benefits of diversification and to remember the big picture.
Whether or not we will enter a recession or even a depression remains to be seen. A recession is defined as two consecutive quarters of economic decline, while a depression is a deep and long-lasting recession that can go on for several years. Unlike the last recession of ’08-’09 that was caused by a bubble in housing prices, the current economic downturn is not bubble based, but rather event-based. While we do expect to see decreased economic output in the near term, there is also an element of pent up demand, meaning at some point when the work restrictions are lifted, we would expect people to make up some of their spending. This shift forward in demand doesn’t mean we will recover all lost spending, but we should recover some. That should alleviate a bit of the pain that we have experienced thus far. In the meantime, we will do our best to stay appraised of the situation and continue to offer updates as we learn more.
*A version of this article first appeared on the Lovely Abundance blog on March 26, 2020.