Fear well and truly takes hold as the Fed throws more money at the problem

We used the phrase rollercoaster to describe recent volatility in equity prices, that description was very apt for the events that occurred during the past week. As an example, after a 9% fall on Thursday, the S&P 500 regained a similar amount the following day. One of the sharpest falls in history, followed immediately by the biggest one-day rise. The Dow booked moves of roughly 5% or better for every trading session of the entire week. The Vix index reached levels last met in 2008 and the CNN fear and gauge index hitting extreme fear. The FTSE 100 had an even worse week falling almost 20% in the space of five days. Possibly slightly surprisingly the US ten-year bond yield remained largely where it was from the start of the week at just below 1%.

The question of when the longest bull market in history has been answered, 11th March 2020. The rally in US equities on Friday came as the US declared a national state of emergency and neared a deal with congressional leaders on a coronavirus aid package. On Sunday evening Federal Reserve added to the stimulus measures, announced last week, cutting interest rates by 1% to zero and starts a 700bn dollar purchase program. The Fed also cut reserve requirement ratios for thousands of banks to zero. These announcements are reminiscent of the measures taken by the Fed to stave off the financial crisis of 2008.

The drastic measures to combat the spread of the virus, closing of borders, the requests for members of the public to stay at home, the hoarding of food could result in the impact on the global economy being severe. Generally throwing money at the financial system works as we saw in 2008, the uncertainty this time, as the scenario is so different from others in the past is will it again. Cheap money will not get the general public in to a cinema or restaurant, or possibly exchanging their car as they look to hoard cash.

The continued uncertainty as to what the eventual impact will be on the global economy may persist putting pressure on equity prices despite the wave of cash central banks are throwing. However, for those who see the glass as half full, there may be some cause for modest hope. Apple announced on Friday that all of their 42 stores are open in China. This is further evidence that the Chinese authorities have the virus under control. The Wall Street Journal reported that tests are being done on a drug, remdesivir, which had been successful in treating Ebola, may be adapted to fight covid 19. JP Morgan, according to a report on CNBC, believe the sell-off is overdone and the recession risk overblown. JP Morgan reiterated its belief that the S&P 500 will recover all its losses by the year end. With fear at extremes the possibility is we may be a little closer to the bottom.