The U.S. Government, along with other governments around the world, is taking unprecedented steps in hopes of containing the Coronavirus and its impact on our society. Social distancing strategies are effectively grinding the economy to a halt as individuals and families forego most discretionary spending and businesses adjust to altered workforces.
A by-product of these steps to ultimately save lives is a lack of liquidity to our financial system. This past weekend, the Federal Reserve announced an emergency rate cut bringing interest rates to near 0% while also announcing asset purchases of at least $700 billion that will begin immediately. These steps are designed to facilitate access to monies for businesses from banks. The Federal Reserve also has the capability to extend its asset purchases to short term fixed income assets if needed, but appears to be holding off from doing so at this time.
However, the mood on Wall Street right now can best be described as “sell first, ask questions later” and on Monday the U.S. equity markets experienced the second largest one day percentage decline in history. Declines of this nature are fueled more by Fear and knee-jerk reactions than any economic, fundamental, or technical analysis. Already this month we experienced a decline of 9.99% for the Dow Jones one day to have it followed by a gain of 9.36%, then a decline of 12.9%.
A growing number of professional traders rely on preset algorithms to make computerized trades. They are dictated by a series of inputs, with one of the most important inputs being the equity markets own volatility. As a result, when things get wild, computers at these firms start selling – essentially make it even more wild. This trading affects upside moves as well as to the downside.
At this point in time, the equity markets are having difficulty accurately pricing companies due to a heightened level of fear and uncertainty surrounding future economic activity. On one day, advancing issues will outnumber declining issues 7 to 1, only to have that reversed the very next day. There is a lack or rational investing taking place which has created a vacuum for leadership on the equity markets and allows second by second news headlines to move prices either direction. We have not seen the Coronavirus (or anything like it) before, but we have seen this type of investing behavior. It does not last.
Cooler heads will prevail. We feel the equity markets are currently mispriced and will look for ways to use that to your benefit moving forward. Eventually, we will head down the road to normalcy. You can expect more frequent communications from us along the way to help keep you current as to our thoughts during the recovery.
The Lesjak Planning Team