Both the S&P 500 and the Dow Jones stock indexes crashed further after opening on Monday morning, falling so far that a circuit breaker kicked in to temporarily halt trading, as investors fear the Federal Reserve has used up all its ammunition and it is still not enough.
As the coronavirus pandemic suffocates the global economy, the Fed announced on Sunday its second emergency cut to its interest rate target, this time to near zero, and launched a quantitative easing program worth $700 billion to keep credit flowing during the turmoil.
A global recession looms as efforts to combat the virus, such as lockdowns and quarantines, leave businesses shuttered and people stuck at home. As the pandemic worsens, these measures tighten and further choke business and consumer activity.
Both the S&P and Dow Jones were down by more than 9 percent in early trading the day after the Fed moved, wiping the gains made during Friday’s rally. Stock markets elsewhere across the world, including the U.K.’s FTSE 100 and France’s CAC 40, were also sharply down.
“They basically used the bazooka yesterday,” Peter Berezin, chief strategist at investment advisory BCA Research, told Newsweek. “I think the reason the markets sold off is because investors adopted the narrative that if this is the best you can do it’s not good enough, and now that you’re out of ammunition we’re screwed.”
Berezin said he gives Fed Chairman Jerome Powell “full credit for acting quickly and decisively” but there is a limit to what the central bank can do.
“Right now the burden has to fall on fiscal policy to prevent what will certainly be a deep recession from what will be even deeper,” Berezin told Newsweek. “It’s unclear what’s going to happen but it’s not unclear what should happen.”
He said there should be no concerns about debt sustainability around fiscal stimulus that increases the federal budget deficit because interest rates are below the growth rate of the economy. Deficit-expanding fiscal stimulus is urgently needed.
“So if we end up in a deep recession I don’t think you can blame the virus,” Berezin said. “I think you have to blame policymakers for being so shortsighted and incompetent that they allowed what was obviously a major shock to the economy to morph into something that could have been completely avoided, which is a prolonged period of high unemployment.”
After negotiations between the White House and Congress, the House passed a coronavirus stimulus package on Saturday and it is now with the Senate. Further stimulus is likely as the economic toll of the coronavirus worsens over time.
Matthew J. Maley, managing director and chief market strategist at trading firm Miller Tabak + Co., said it was a combination of two things that “gave investors a slap in the face” over the weekend.
Maley said the Fed’s actions, which came 72 hours before its scheduled meeting, “raised the concern among investors that this crisis is going to be worse than most people think.”
Moreover, comments made by Dr. Anthony Fauci, the Trump administration’s top doctor leading the fight against the coronavirus outbreak, that the U.S. should consider a 14-day national lockdown also caused significant concern.
“The consumer is 70 percent of the U.S. economy and the government’s top infectious disease expert just told us that the consumer is going to get shut down even more,” Maley told Newsweek.
“This does not mean that what Dr. Fauci or the Fed did was wrong. They obviously did these things to keep the situation from getting even worse. So maybe the pain they have inflicted is worth it…because they believe it will keep things from becoming even more painful.”
Maley told Newsweek it is hard to say where the bottom is in the current market drop.
“However, we rarely get V-shaped bottoms,” Maley said. “Bottoms are usually formed in a ‘process.’ They usually involve at least a few sharp ‘failed rallies.’ Therefore, investors should avoid trying to pick a bottom by jumping back into the market with both feet at one time.
“Gradually wading back into the markets over many weeks is a better idea. There are many great companies with strong balance sheets and lots of cash. The stocks of those companies are going to provide fabulous opportunities over the coming weeks.”
Shaun Murison, senior market analyst at IG, told Newsweek that Friday’s rally in stocks “looks to have been a short term rebound in a much more severe longer-term downtrend for equity markets.”
“The Fed’s cutting of benchmark lending rates and another bout of quantitative easing almost seems an admission of how critical the current COVID-19 pandemic is to global growth,” Murison said.
“Central bank monetary easing and stimulus initiatives are unfortunately not able to reconnect the global supply chains which are being further disrupted as more and more quarantine areas are established.
“It seems inevitable that the global economy is moving towards a recessionary environment and markets may be concerned that central banks are exhausting their options with minimal effect too early in the economic downturn.”
Murison added: “We don’t yet know where the bottom is for markets, as we don’t yet know how long it will take to contain and reverse the course of this current disruption.”