"Expert Take" banner over football player throwing a football

In an unprecedented move, the Federal Reserve Board (Fed) cut interest rates to zero, launched a $700 billion bond buying program and took other measures to ensure liquidity in credit markets and a stable dollar. These actions highlight the urgency of the economic situation evolving from coronavirus driven closures and cancellations.

Previously on March 3, the Fed had cut interest rates by 50 basis points (or 0.5%), making this the second consecutive rate cut before a scheduled meeting — a situation that hasn’t occurred since the bank began announcing its rate changes in 1994.

It was certainly a surprising move, but the decision showed policymakers are monitoring the situation closely. In our view, it’s better for the Fed to be proactive than reactive.
Despite the Fed’s action, coronavirus fears continue to weigh on investors’ minds this morning and the S&P 500 hit a circuit breaker at the market open for the third time in the past week.

The chart shows interest rate fluctuations from 1980-2020, with the lowest point reaching 0% from 2010-2015 and 2020.

The environment is changing quickly.

Rate cuts of this magnitude are fairly rare, and the Fed typically reserves measures like these for significant economic weakness. We have yet to see many signs of that in U.S. economic data, but the coronavirus situation here in the U.S. is escalating quickly, as cities closed schools and partially shut down restaurants and businesses. As business activity slows and more individuals socially isolate amid work from home mandates, we expect near-term economic growth to be negatively impacted.
Many investors are now contemplating a recession during the first half of 2020, with the potential recovery in the second half of the year to be determined by the federal government’s fiscal response and the speed of containment of the virus.

The Fed’s latest measures have been monetary policymakers’ shot in the arm for the financial system: protection against what could happen down the road, instead of what’s happening now. In Fed Chair Jerome Powell’s Sunday comments on March 16, he emphasized that these decisions were made to help ensure financial stability and ease credit conditions for households and businesses if the U.S. economy were to weaken significantly in the following quarters. Even Powell noted that it’s hard to say how much the virus could impact economic growth, but emerging trends have pointed to a need for looser monetary policy.

What about the markets?

It has been an unnerving few weeks in U.S. stocks, with a painfully swift S&P 500 selloff that hit bear market territory (20% below a 52-week high) on Thursday, March 12. The downward pressure continues today. Stock volatility has been the highest since the financial crisis, and a lot of uncertainty remains.
In most recessions, the Fed cuts interest rates by an average of 5% points to support economic growth. The only other time the Fed reduced rates to zero was during the financial crisis from 2007 to 2008 when rates went from around 5% to zero in a series of 10 rate cuts over 15 months. When the Fed made its final rate cut in December 2008, the U.S. economy was about a year into one of the worst economic downturns in history. Notably, the S&P 500 Index fell another 26% before turning the corner in March 2009, when the almost 11-year bull market began.

It is hard to tell if we will see another drastic move down like we did at the end of 2008, given how quickly the market has moved already and how fast the Fed has been to act. It may take some time for monetary policy to flow through the financial system and to calm markets.
One clue could be in the price-to-earnings (P/E) ratio of the S&P 500. After the open today, the forward P/E will be 14.2x based on current the EPS estimate of $169. During the December 2018 near-bear market, the forward multiple bottomed at 14.1x. The concern is that EPS is likely to be reduced more significantly once more information is known about how the economic slowdown will impact profitability. The market could follow that move lower in earnings. In 2008, the market multiple bottomed around 10x.

So far, policymakers have proven they’re willing and able to do what’s needed in order to fend off a recessionary environment, and an early policy response is preferable to being too late. Bear markets can be uncomfortable, but they haven’t always led to recessions, and policymakers are monitoring the situation closely.

Stick to your plan.

You have an investing plan for a reason: to be your guiding light during periods like this. Significant uncertainty around the coronavirus’ impact on domestic and global economies remains and because of that, stock-market volatility is likely to persist. That type of environment can be unsettling for many, but it’s never good to make any decision — investing or otherwise — under duress. History shows that the market recovers from bear markets, but it may take some time. Through that time, Ally will continue to be by your side, helping you navigate these turbulent waters.

For more insights on the market, as well as options trading strategies, watch today’s episode of Stock Play of the Day.

The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
 

Speech bubble icon next to text "Expert Take"

Headshot of Lindsey BellLindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.

Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.