It has been a see-saw week with equity markets seeing both highs and lows. The coronavirus and reactions to the virus continue to significantly impact performance of investment markets. Equity markets took a big dip last Thursday, after global increases in the number of coronavirus cases was reported. This is despite the number of Chinese cases leveling off. The S&P 500 Index was down 4.4%.

The index traded down a little more on Friday. However, on Monday, markets whipped around and recorded a one-day performance of 4.6%. The positive performance was attributed to commentary from the Federal Reserve (Fed) saying they were willing to do whatever it takes to prevent an economic slowdown. Markets got excited for the potential of rate cuts. Markets changed their tune when the actual cut happened. Tuesday saw a dip of 2.8% after the Fed announced they were cutting the Fed Funds Rate by 50 basis points.

The thought on the adverse reaction is that the cuts, which came two weeks before an official meeting, signaled the anticipated economic impact of the virus was worse than expected. Why else would there be an emergency mid-cycle cut? Fed Chair, Jerome Powell, clarified in statements later the cut was done before the meeting because the Federal Open Market Committee (FOMC) had decided to go ahead with the cut. The FOMC board members did not see the point in waiting for a meeting if they had decided to cut rates. Wednesday saw a significant appreciation in the S&P 500. It closed the day up 4.2%. The swing could be the market settling to the rate cut and also, potentially as a result of Super Tuesday primary results.

The equity market was not the only place with heightened activity. It’s been a bit of a ride in the fixed income markets too. The 10-year Treasury yield hit a new record low last week. Since then yields have dropped an additional 40 basis points to break through 1.00%. It was the largest 10-day decline in yields since 2011, and it all started with yields already close to record lows. On top of the Fed cut, the market is pricing in slightly more than 50 basis points in an additional cut at the FOMC meeting in two weeks. Historically speaking, 50 basis point emergency cuts do not mark a bottom, but rather see yields continue to fall and equities struggle in the near-term. Therefore, it might not be a shock to see the market anticipating the zero bound to be hit again, despite hope that the United States wouldn’t follow the scenarios that have played out in Japan and Europe.

Contributed by | Kuuku Saah, CFA, Managing Director & Justin Carley, CFA, Managing Director

Kuuku is a Managing Director at BTC Capital Management with nine years of investment management experience. Kuuku’s primary responsibilities include portfolio management and analysis. Kuuku attended Drake University and double-majored in finance and economics. He is a holder of the right to use the Chartered Financial Analyst® designation.

Justin is a Managing Director, providing portfolio management and credit analysis for fixed income strategies. He also manages the firm’s multi-manager portfolio strategies and contributes to the asset allocation framework. Justin has more than 10 years of experience focusing on management, analysis and trading of fixed income portfolios. Previously, Justin was a fixed income portfolio manager at American Trust & Savings Bank. Justin has a bachelor’s degree from Truman State University, holds the Chartered Financial Analyst designation and holds a Fellowship in the Life Insurance Management Institute.

Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
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