Monday’s sell-off scary, but also entirely normal. In a market that may have run a bit ahead of itself, sensitivity to a downside catalyst is not surprising. And while fear of a second major Covid-19 outbreak developing is a legitimate concern and did merit some market repricing, progress toward containment remains the baseline. The S&P 500 Index currently sits about 5% from its all-time high, within the norm for similar outbreaks historically, while S&P 500 futures are pointing to stabilization overnight.
Third-largest drop ever. The Dow fell 1031.61 points yesterday, for the third-largest one-day drop ever. Although this made all the headlines, it is very important to remember to look at the percentage drop to get a more apples-to-apples comparison. Yesterday’s 3.56% drop ranks as the 254th largest drop ever, significant but quite a different story.
Fed likely holding a surprise insurance cut in reserve. If the Federal Reserve (Fed) similarly expects a second half economic rebound, it will be reluctant to cut rates, but would certainly move to help restore confidence if needed. Expect Fed talking points to deemphasize a cut, maximizing the impact of a cut should we need one. Any cut would likely be characterized as an “insurance cut,” and may even be accompanied by language pointing to a single hike should the economy rebound.
Bonds have a 40+ year track record of resilience, but lower yields should temper return expectations. In the 43-year history of Bloomberg Barclays Aggregate Bond Index total returns, the index has only posted three calendar years with negative returns, the worst of them in 1994 at -2.9%. But as yields fall, returns have also fallen. Bonds have received a boost from declining yields since they peaked in 1981, and rising rates could still lead to losses. For a deeper dive, see the LPL Research’s Blog, to be posted later today.
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