Market Dives Despite Quantitative Easing

Yesterday, in a highly unusual Sunday meeting of the US Federal Reserve's Federal Open Market Committee, the FOMC announced a 100 basis point cut to its overnight target rate and $700 billion of quantitative easing. These extraordinary steps to provide liquidity and ensure continued functioning of the global financial system joined the Bank of Canada's decision to cut rates at an emergency meeting on Friday.  

With the cavalry having arrived, some investors might have expected the global equity markets to rally this morning. Those investors would have been disappointed. Dow Jones Industrial Index (DJIA) futures hit limit down before the open, and the S&P 500 fell 7% almost immediately after the open, triggering circuit breakers.

The Dow Jones closed down almost 13%, and the S&P 500 closed down 12%, according to Thomson One. Here is this year's performance of the S&P 500:

Source: Bloomberg, March 16th

Coronavirus a Unique Shock to World Economy

At this point, it's safe to say that coronavirus (COVID-19) is a unique shock to both the supply and demand sides of the global economy. Monetary policy is not going to restore normalcy to the markets on its own, as no amount of cuts to overnight target rates will allow people to work, socialize, and participate in the economy.

Once the virus has passed, the work of restarting the global economy will begin. We're being told that the financial system is well-prepared to absorb this shock, and that policy-makers will use every tool in their toolkit to preserve normalcy. However, millions of people will still go without work or income for a period of weeks or months.

Our Outlook

Now is not the time to panic. The priorities for both institutional and individual investors should be broadly the same:

• Ensure your cash position is sufficient to weather a period with reduced or zero income;

• Be ready to deploy excess cash once a state of normalcy is established and the threat of the virus has subsided.

Take comfort in the fact that all market participants are experiencing the same headwinds right now, and be ready to take advantage once things return to normal. Our team is closely monitoring global markets, the best options for Canadian cash management, and the spread of the coronavirus. We are taking all measures necessary to ensure the safety of our client portfolios and are operating at full capacity. Call us at 604.643.0101 if you have any questions.

Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.