Market Meltdown Continues

U.S. stocks tumbled 12% on Monday after the Fed slashed rates to zero.

Financial markets melted down on Monday after a surprise Fed rate cut to zero failed to calm panicked investors. The S&P 500 opened lower by more than 7%, triggering a Level 1 circuit breaker that halted trading for 15 minutes right off the bat. After a volatile day or trading, the index closed down by 12%, the third largest single-session decline ever. 

Peak-to-trough, the S&P 500 has fallen 29.7%, its largest decline since the financial crisis, when markets fell by more than 56%.

Investors increasingly believe that the global economy is heading for a recession as the coronavirus shuts down commerce. European economies from Italy to Spain to France were in the midst of large-scale quarantines in an attempt to stem the tide of new cases and deaths.

On Sunday alone, Italy reported 368 new deaths and nearly 3,600 new cases. In the U.S., where the situation is not yet as dire, there were 3,774 total cases and 69 total deaths reported so far.

The U.S. has yet to see the wide-scale restrictions that Europe has, but it’s moving in that direction. Many states have ordered restaurants, bars and schools to shut down. Citizens have been advised to socially distance themselves from others and to hunker down at home for the next several weeks at least.

While necessary to slow the growth of new virus cases and prevent the health care system from getting overwhelmed, such measures will have an enormously negative impact on near-term economic growth.

Goldman Sachs estimates that U.S. GDP in the second quarter could contract by 5%, while J.P. Morgan says that economic growth could be negative for two straight quarters.

The drastic reduction in economic activity will certainly weigh on corporate earnings and cash flows.

ETFs Making Moves

ETFs moving the most on Monday included the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX), which spiked 37.1% as the VIX closed at 82.7, its highest closing level ever. 

Also doing well was the iShares MSCI Global Silver Miners ETF (SLVP) and the VanEck Vectors Gold Miners ETF (GDX), up 16.3% and 18.4%, respectively, on the session, even as gold prices sagged 1% to $1,514/oz.

In the fixed income space, the iShares 20+ Year Treasury Bond ETF (TLT) added 6.5%. The 30-year Treasury bond yield was down 25 basis points to 1.32%—though that is well above the 0.7% low hit last week.

On the other hand, the iShares iBoxx USD High Yield Corporate Bond ETF (HYG) tumbled 5.5% to its lowest point since 2016. Investors worry that large-scale business shutdowns across the nation will lead to defaults in the lowest quality debt.

Contact Sumit Roy at [email protected]