By Scotia Wealth Management - The Zukiwsky Group

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Market Watch: June 12, 2020

Jun 12, 2020 | 10:14 AM

Big Picture

U.S. Officially in Recession; Nasdaq Hits New Highs Before Rough Thursday

It may come as no surprise, but it’s now official. According to the National Bureau of Economic Research, the U.S. entered a recession in February, marking the end of the 128-month expansion that was the longest going back to 1854. Meanwhile, the World Bank said this week the global economy is expected to shrink by about 5% in 2020 as a result of the coronavirus pandemic, making it one of the four most severe downturns in 150 years, noting that never before have so many countries entered a recession at once

In other economic news, the Organization for Economic Cooperation and Development said a second wave of lockdowns to counter a resurgent novel coronavirus would deal a terrible blow to a global economy already facing a severe contraction. The OECD said it expected the global economy to contract by 6% this year if a second wave of infections and containment measures can be avoided. However, the news in the U.S. isn’t particularly good as some states that were largely spared from the pandemic are now seeing record hospitalizations, causing experts to fear that a second wave may be an inevitability.

Finally, Fed officials on Wednesday signaled plans to keep rates at zero for years, adding that the U.S. unemployment rate would average between 9% and 10% during the last three months of the year.

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All the sobering news and data has had a chilling effect on markets, especially as the week progressed. On Monday, markets were up as Friday’s surprisingly upbeat jobs report continued to fuel hopes for a quick recovery. The Dow was up more than 460 points, while the TSX added 121.

Although the TSX, S&P 500 and Dow fell on Tuesday and Wednesday after recent strong gains, the Nasdaq was becoming the story of the week after hitting new highs in the first three sessions and closing above 10,000 for the first time on Wednesday.

However, market sentiment soured drastically on Thursday as investor fears of a surge in coronavirus infections sent stocks into free fall. By Thursday’s close, the Dow was down more than 1800 points, nearly 7%, while the Nasdaq lost 527 and the TSX plunged 650

N.A. Markets Down After Rough Thursday

For the four days covered in this report, the Dow dropped 1,983 points to close at 25,128, the S&P 500 dropped 192 points to settle at 3,002, while the tech-heavy Nasdaq lost 321 points to close at 9,493. In Canada, the TSX tumbled 803 points to end at 15,051.

Strategy

The Fed enters “learning mode” as it leaves room to adjust policy as needed in the future

The U.S. Federal Reserve held its policy rate unchanged at its meeting Wednesday, as was widely expected with the lower bound of the Federal Funds Target Range at zero and limited appetite for negative rates from policymakers. The Federal Open Markets Committee (FOMC) also published their Summary of Economic Projections (SEP) which outlines each Committee member’s personal views on the trajectory of the U.S. economy and policy over the forecast horizon. The plurality of policymakers see no interest rate hikes until at least 2022, per the Dot Plot, and the accompanying statement indicated that the current target range would be maintained until the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. To that end, the Chairman Powell offered that the Committee has entered “learning mode” and would prefer to wait and see how economic outcomes unfold in the coming months before committing to stronger forward interest rate guidance, asset purchase parameters, or any kind of yield curve controls. Mr. Powell explicitly referenced yield curve control in his opening statement and explained that while policymakers have reviewed the international experience, they are unsure about the effectiveness of the tool and how it would complement existing support mechanisms. On the topic of asset purchases, guidance was strengthened modestly to reflect the Fed’s intentions to increase its holdings of Treasury securities and maintain purchases of agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning.

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