U.S. stocks have resumed their downturn after Friday’s rally amid extremely volatile trading. After opening limit down on Monday, for the third time since a week ago, triggering a trading halt, then falling further on the reopening, stocks recovered some of their early-morning losses. By late morning, the S&P was down 5.7 percent and the Dow Jones Industrial Average off 7.5 percent.
Bonds also reversed their recent trading behavior in early-morning trading, with yields falling after rising in several sessions last week. Bonds yields usually fall when stock prices decline, especially at times of growing concerns about a possible recession, and that’s what happened Monday morning. But by late morning, the 10-year Treasury yield was rising again, at 0.85 percent, up about 10 basis points (bps) from the open.
The Fed slashed the federal funds rate Sunday evening by 1 percentage point, to a range between 0 and 0.25 percent, days before the start of the Federal Open Market Committee’s (FOMC’s) regularly scheduled policymaking meeting. The latest cut followed a 50 bps cut on March 3.
The Fed also announced a revived quantitative easing program to purchase at least $700 billion in U.S. Treasuries and mortgage-backed securities, which followed plans announced last week to inject as much as $1.5 trillion into the short-term money markets.
“To move like this three days before the meeting tells me to expect an avalanche of horrible data in the next few weeks,” tweeted David Rosenberg, chief economist and strategist of Rosenberg Research and Associates Inc.
Also on Sunday, Goldman Sachs forecast a 5 percent decline in U.S. GDP for the second quarter, and its U.S. chief equity strategist, David Kostin, slashed his forecast for the S&P 500, noting it could fall another 26 percent from Friday’s close, to 2,000, if the economic fallout from the spreading coronavirus worsens.
“The coronavirus has created unprecedented financial and societal disruption,” he wrote in a note to clients. “The combination of thin liquidity, high uncertainty, and positioning could cause the S&P 500 to fall below our 2,450 base case estimate of fair value and closer to a trough of 2,000.”
Recession fears are growing for the United States—a Bloomberg survey of economists gave 45 percent odds for one this year—and globally.
Whole countries are under lockdown, and throughout the United States, schools, theaters, gyms, and other gathering places have shut down; all National Basketball Association, National Hockey League, and U.S. Soccer games are canceled, along with the NCAA annual tournament (March Madness); and many businesses are advising or mandating that workers work from home.
On Sunday the Centers for Disease Control and Prevention recommended that events of 50 people or more not be held for about two months—excluding schools, institutes of higher learning, and businesses, although many of these entities have taken steps of their own.
Also Sunday, after praising the Fed’s rate cut, Vice President Mike Pence announced that the administration will have “updated federal guidelines” Monday regarding whether restaurants, bars, and other businesses should stay open, as the coronavirus crisis pauses American life as usual.
On Monday, the Senate is expected to vote on an economic aid package that passed the U.S. House of Representatives in a very early Saturday morning vote. The package, negotiated between House Majority Leader Nancy Pelosi and U.S. Treasury Secretary Steven Mnuchin, includes free testing for the virus; paid sick leave for employees at many, though not all, businesses; and additional funding for food stamps and Medicaid.
“The question is not whether we’re going into a recession, it’s just how deep the recession is actually going to be,” said Cam Harvey, partner and senior advisor of Research Affiliates, in a recent company audio interview on The Economic Impact of COVID-19.
In past U.S. recessions, the Federal Reserve came to the rescue, most notably during the global financial crisis of 2007 to 2009. It slashed interest rates, initiated quantitative easing, and took other measures to provide liquidity to the markets. “This time is different,” says Harvey. “What the Fed can do is very limited,” as it is starting from a position of very low rates, well below the 5.25 percent federal funds rate at the beginning of the 2007 financial crisis.
That crisis “was caused by a financial event. What we’re seeing today is a financial crisis caused by a health event.” The current crisis requires a response to the health crisis as well as liquidity provided by the Fed for the financial markets and provided by the Treasury to help small business, because if those businesses fail, it will be harder for the economy to recover.
Economist Nouriel Roubini tweeted, “Without huge fiscal bazooka stimulus, the monetary one is impotent. Only a large monetized fiscal deficit will stop the demand collapse that’s worse than in the GFC!”