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What’s going on with the stock market? The ride won’t get smoother soon

 


After a week of an unprecedented public health crisis that virtually ended business, travel, entertainment and education, when virtually all Americans had to stay at home, how much would it have Was it wonderful to be warned of the coming cataclysm?

In addition to being able to store hand sanitizers and toilet paper before they are removed from store shelves, you could have avoided at least some of the $ 12 trillion vaporization of stock market wealth that has produced last month by Wilshire Calculation of Partners. This included $ 4.3 trillion in the past week, the hardest hit since October 2008, at the height of the financial crisis.

A sci-fi fantasy of time travel? Not if you are among the privileged American senators who sold stocks with premeditation just before the sudden fall of the markets. In particular, Senator Richard Burr, a Republican from North Carolina, who sold assets on February 13 worth $ 628,000 to $ 1.7 million, ProPublica and the Center for Responsive Politics reported on Thursday.

Burr, who sits on two committees that received detailed information about the coronavirus threat weeks before it beats stocks, sold shares of hotel companies which then slid from 50% to 74%, according to the Wall. Street Journal. Sens Republicans Kelly Loeffler and David Perdue of Georgia and James Inhofe of Oklahoma, as well as the husband of Senator Dianne Feinstein, a Democrat from California, were also active traders in front of the collapsed markets, the Journal added.

Burr said his sales followed what he had gleaned from CNBC health and science reports from Asia at the time. The other senators said that their investments were managed by advisers, not by themselves. Would we all have had such wise investment advisers?

Even with hindsight, however, their advice would likely have been to move from the risky equity market to the safer credit markets. This has proven almost as bad for wealth, in many cases, as sticking to common stocks despite the federal government’s unprecedented efforts to support certain sectors of the bond market, including those beyond its portfolio of mortgage-backed securities.

After Jerome Powell & Co. amazed global markets on Sunday evening by cutting the target rate for federal funds by one percentage point, to its crisis low of 0% -0.25%, the Fed revived a number of facilities in times of crisis, in particular to support the commercial paper market (short-term IOUs). The Feds totaled direct securities purchases and buyout deals on time, and it also prompted banks to borrow more than $ 28 billion from its discount window starting on Wednesday, a facility that had become stigmatized because deposit-taking institutions fear that its use could be seen as a sign of financial weakness.

Despite these efforts, the corporate, mortgage, and municipal markets have been disrupted by investors seeking or needing to sell securities, raise funds to respond to margin calls, or simply seek shelter. the steps.

I’ve never seen such volatility in a single week in corporate debt markets, says Cliff Noreen, head of global investment strategy at MassMutual, the large insurer, where he has been an investment pro for 35 years.

Among the large American companies, Noreen cites
General Electrics
(ticker: GE) $ 11.4 billion 4.418% bonds due November 2035, which traded Friday at a price of 84.07 (or $ 840.70 per $ 1,000), for a yield of 6%, or 500 basis points (five percentage points) compared to comparable Treasury securities. The GE validated Baa1 by
Moodys Investor Service
and Standard & Poors’ BBB +, three notches above speculative quality junkhad, got a premium price of 110 two weeks ago, notes Noreen.

In the high-yield sector,
You’re heres
(TSLA) 5.30% notes due in 2025 were traded Friday at 81.50, a huge spread of 900 basis points. They had traded above 100 not long ago, he notes, as the electric automaker reduced its credit risk by wisely issuing $ 2.3 billion in stocks in February, while its stock was close to its 52-week high of $ 968.99, more than double Friday. $ 427.53.

The mortgage market is also in turmoil, says Walter Schmidt, executive vice president of mortgage strategies at FHN Financial, because leveraged players were forced to close out positions. The increased purchases by the federal government on Friday, however, helped stabilize the market.

Although Schmidt did not name names, the stocks of mortgage real estate investment trusts, current and preferred, were under extreme pressure during the week, as they have been for a month. the
IShares Capped Mortgage Real Estate Investment
the exchange traded fund (REM) is down 58.6% from its recent peak.

The bond market has also experienced massive sales of mutual funds and tax exemptions in the longer term. Again, the Fed came to the rescue, offering short-term ammunition support, similar to what it planned for commercial paper. However, the iShares National Municipal Bond (MUB) FNB ended Friday more than 13% below its level in early March. Fixed capital funds have lost 25% or more.

These market paroxysms reflect a massive economic contraction that has only just begun. Last week, this column suggested that the United States’ gross national product could see its most rapid fall ever recorded, exceeding approximately 8% during the financial crisis of 2008 or the credit checks of 1980. Friday, the big banks respected downgraded their forecasts, with
Goldman sachs
estimating that second quarter GDP could decline at an annual rate of 24%.

Rather than trying to put a number on it, it may be better to think in terms of biblical disasters. The best guess is that it can last 40 days and 40 nights, like the flood Noah encountered. Were at the start of quarantine in our own arches. Maybe see a dove when the waters are about to recede.

Write to Randall W. Forsyth at [email protected]

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