Since the surprise rate cut, the S&P 500 has fallen 3.8%.
By Wolf Richter to the WOLF STREET.
The whiplash-causing volatility in the stock markets has done a lot. Today the S&P 500 ended the day down 1.7% after a last minute push that fizzled out in the last five minutes of trading. Given the size of the recent movements, that was mild.
For the last four days through Thursday, the S&P 500 rose or fell over 2% each day, with two moves above 4% and two moves around 3%. These four sessions in a row, with upward or downward movements of over 2%, were the longest of their kind since 2011 (August 8th, 10th and 11th) during the euro debt crisis. And before that, in October and November 2008, there were four consecutive days of 2% moves up or down after Lehman collapsed. In the last 10 trading days, the S&P 500 was up over 2% in seven of them – two up, five down – and 3% or more in six of the last 10 trading days:
In the 12 years since 2008 there has not been a series of five days in a row with 2% moves. Today it would have been almost the fifth day with 2% removals (up to the last 20 minutes), but no cigar.
And exactly this week, Tuesday morning, the Fed announced its surprising and shocking 50 basis point rate cut, which sparked a huge rally in government bonds, with 10- and 30-year yields falling to record lows. Such a rate cut was supposed to get stocks into the stratosphere, but the opposite happened.
The S&P 500 fell 2.8% on March 3, the day of that infamous cut [Stocks Sag as Fed Cures Coronavirus by Cutting Rates ½ Percentage Point]. The next day it rose 4.2%, but on Thursday and Friday the markets cleared again. In the four days since the shocking rate cut, the S&P 500 is down 3.8%.
The S&P 500 is now down 12.2% from its closing high 12 trading days ago. The S&P 500 has fallen 8.0% since the start of the year. So that’s not a lot, but the path to get there with huge drops and jumps was a bit rough. Despite the five days of market turmoil this week, overall up and down, the S&P 500 was up 0.6% from last Friday’s closing price. These five days are the bold part in the straight line down:
A similar scenario played out in the other indices:
- The Nasdaq is down 1.9% today, down 4.4% since the start of the year and 12.6% from its closing high on February 19.
- The Dow Jones Industrial Average is down 1% today and is 12.4% below its closing high on February 12th.
- The Russell 2000 index for small cap stocks is down 2% today and is 15% below its closing high on January 16.
So if you just look at the numbers where the indices fell 12% to 15% from their closing highs, this sell-off is nothing special. But the volatility, the huge ups and downs of the past two weeks irritated some nerves.
Efforts to contain the coronavirus have seriously hit a few sectors, including the entire travel sector. And cruise ship and airline stocks have collapsed completely in the past two weeks.
But in terms of size – and weight in stock market indices – they pale in comparison to Apple, Alphabet, Microsoft, Amazon, and Facebook. The combined market capitalization of these five companies peaked at $ 5.59 trillion on February 19. The market capitalization of the S&P 500 is $ 24.4 trillion. Excluding these five companies, the remaining approximately 495 of the S&P 500 companies had a combined market cap of approximately $ 19.5 trillion at current prices. So now I have a new index, the “S&P 5” – and it’s down 13.3% from its February 19th high:
In terms of the stock market as a whole, it wasn’t the decline over the past two weeks that was outstanding – it’s rather mild – but the brutal volatility, the huge up and down movements that suggest there’s more going on than just one regular stock market correction.
The fact that this type of volatility last occurred during the euro debt crisis (2011) and during the US financial crisis (October and November 2008) is not a good sign.
And as for the Fed’s bailout of the stock market with further rate cuts, well, there’s not that much left to cut. Two more shocking cuts and it’s over. The Fed got rid of negative interest rates for one important reason: In countries where negative interest rates are the order of the day, bank stocks have completely collapsed, falling to a tiny fraction of their pre-crisis highs.
The ECB is trying to hold the Eurozone together and doesn’t care about bank stocks. But the Fed works for the banks. The banks own the 12 regional Federal Reserve Banks and their governors sit in the FOMC, which creates a different relationship. So the Fed won’t do NIRP because that would crush bank stocks. It can use other “tools”, but not NIRP.
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