A rundown of the Fed’s surprise rate cut, the latest on COVID-19, and a recap of the Democratic Primary’s Super Tuesday results.

Market Update


What a month.
In the first two weekdays of March, the Fed cut interest rates in between meetings for the first time since the financial crisis, the yield on 10-year U.S. Treasuries dropped below 1.0% for the first time since the light bulb was invented, and former Vice President Joe Biden has regained momentum in the Democratic nomination contest.

Stocks remain volatile. Just yesterday, the S&P 500 traded in a range from ~2,980 to ~3,140—that’s 5.4%. Going back to 2000, only 42 trading days have had a wider range, and 32 of those days were in 2008 and 2009.

Given all that’s going on, we didn’t want to wait until Friday to share the three things that we think investors need to know now:

  • “Emergency cuts” are few and far between. Usually when the Fed wants to make a policy adjustment, it does so at a scheduled committee meeting. It takes extraordinary circumstances for the Fed to move in between meetings. The last emergency cut was during the global financial crisis. Other times the Fed has moved between meetings: in the aftermath of the September 11 attacks, as the Tech bubble was bursting in 2001, and during Russia’s financial crisis and Long-Term Capital Management’s collapse in 1998. COVID-19 has already cemented its place with these infamous market-moving events, whether it turns out to be as severe or not.  
  • It’s a proactive measure. This time around, the Fed seems to be acting aggressively to “sustain the expansion” (Chair Powell’s words, not ours). In his press conference, Powell argued that the existing economic data is still solid, but that COVID-19 is very likely to disrupt economic activity in the coming months. The question remains as to how severe or long-lasting that disruption may be.
  • The Fed “did no harm.” A rate cut isn’t going to help contain the spread of the virus or develop a vaccine, but it certainly isn’t going to hurt the economic backdrop. For now, the lower borrowing costs are, the better for business and consumers. It’s likely that the path of the virus and realized economic consequences will continue to be the dominant drivers of asset prices in the coming days and weeks, but the Fed seems prepared to do what it can to lessen the pain.

The Fed will likely cut rates again. We think it’s likely (the market at large does too) that the Fed could deliver additional cuts at its March and/or April meetings. We also wouldn’t be surprised to see other central banks around the world pursue easing measures of their own—although it’s worth noting that the Fed is really the developed world’s only major central bank with room to cut rates (European Central Bank and Bank of Japan policy rates are both already negative). On one hand, such a strong monetary policy response runs the risk of spooking investors even further. On the other hand, it provides reassurance that central banks will do what they can to stave off a deeper economic downturn.

The line chart shows the Fed funds rate from 2015 through March 3, 2020, and then shows market expectations through 2022. It shows that after the emergency cut, market expectations show the rate continuing to decrease.

  • Some good news: Infection rates are stabilizing in China. Since Friday (February 28), there have only been an additional ~1.4K cases confirmed in China (bringing the current total number of confirmed cases in China to 80.2K). Good news—the pace of newly confirmed cases is slowing, which tells us that China’s containment efforts are working.
  • But the outbreak is still on the rise throughout the rest of the world. Over the same period, there have been an additional ~7.4K cases confirmed outside of China across the world (bringing the current total number of confirmed global cases, excluding China, to 12.7K). That’s bad news. The trend suggests that the virus continues to spread at an increasing rate in countries outside of China (see the chart below), and we think it’s unlikely that many (if any) countries’ responses to contain the virus can be as stringent as China’s has been.
  • A possible silver lining. In the coming weeks, public health officials will hopefully get a better sense of the extent of the issue in the United States. Right now, there seems to be more speculation than solid evidence about the extent of the spread, but we will hopefully know more soon.

The bar chart shows the number of confirmed new cases outside of mainland China from January 23, 2020, through March 3, 2020. It shows that the number has been increasing.

  • Former Vice President Biden has made a massive comeback. Super Tuesday marked the largest event (so far) of the U.S. primary season, and Joe Biden won the night. After flailing in the first three contests on the calendar (Iowa, New Hampshire and Nevada), Biden won 10 of the 14 states that held primaries yesterday (according to the New York Times).   
  • It is starting to look like a two-man race. Based on the New York Times forecast, Joe Biden will lead the delegate count with 670 to Senator Bernie Sanders 589. Senator Elizabeth Warren lost her home state to Biden, while Former Mayor Michael Bloomberg’s only win was American Samoa. Bloomberg announced on Wednesday morning that he’s suspending his presidential campaign, and it remains to be seen whether Warren will do the same.
  • It’s not over yet. First, it may take some time before we know who will amass the most delegates from Super Tuesday due to potential delays in fully counting votes in California and Texas. Second, securing the nomination requires 1,991 delegates, which is no small feat (for comparison, 1,357 delegates are decided in all of Super Tuesday). A number of key states are left, the last race won’t take place until June 6, and the Democratic National Convention isn’t scheduled until July 13–16.
  • The perception of the race has shifted massively. Just last week, prediction markets suggested that Joe Biden had a ~15% chance of getting the nomination, while Bernie Sanders had a greater than 60% shot. Now, Biden’s probability of clenching the Democratic nomination has jumped up to 70%, while Bernie's is below 20%. If there is anything we have learned from this primary season, it is to expect the unexpected.

The line chart shows the percentage chance of winning that Biden and Sanders have had from September 2019 through March 2020. It shows that Biden’s chance of winning has shot up recently, while Sanders’s chance has decreased dramatically.

Markets hate uncertainty. All three of the above dynamics remain extremely fluid, and we expect markets to remain volatile. We’re monitoring them closely and are constantly incorporating new information into our investment views—in turn, this informs the adjustments we make to the portfolios we manage so that they’re best positioned to navigate the current environment.

Will March go out like a lamb? Right now, it seems like only the most optimistic investors think so. What we believe investors should consider doing is ensuring their portfolios are aligned with their goals, and that they are taking the necessary and appropriate amount of risk to achieve those goals over time. In a simple sense, uncertainty and risk enable investors to benefit from capital appreciation over time (higher risk, higher return, etc.), but history suggests that investors only benefit if they are able to stay invested through the uncertainty.        

 

Want some certain good news? Daylight Saving Time starts on Sunday. Enjoy the extra sunshine.

Our Top Market Takeaways for the week of March 4, 2020.

All market and economic data as of March 2020 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

 

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