Fed Launches Largest Set Of Stimulus In History


The Federal Reserve took extremely aggressive action on Sunday evening. From CNBC:

The Federal Reserve, saying “the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” cut interest rates to near-zero on Sunday and launched a massive $700 billion quantitative easing program to shelter the economy from the effects of the virus.

The actions by the Fed appeared to be the largest single day set of moves the bank had ever taken, mirroring in many ways its efforts during the financial crisis that were rolled out over several months. Sunday’s move includes multiple programs, rate cuts and QE, but all in a single day.

Fed actions are powerful forces in markets that should be respected. It would not be surprising if markets responded in a favorable manner. If that is not the case, concerns would increase significantly. The very early read leans concerning, based on how stock futures opened Sunday evening. As always, we will learn something either way in the coming days.


Credit spreads speak to economic and financial system confidence. Widening spreads mean market participants are growing increasingly concerned about an economic downturn and increasing odds of bond defaults.

We have two forms of concerning evidence: (1) spreads recently reached 7.42% and (2) spreads moved a long way in a very short period of time. Based on credit spread data going back to 1996, there have only been four periods when credit spreads moved from the purple line to the upper blue line (2000, 2008, 2011, and 2016). In terms of respecting what the near-vertical push higher in spreads can mean, notice the near-vertical nature of the move during the financial crisis. The chart below and analysis are based on credit spreads as of Thursday, March 12, 2020.

Credit Spreads MAR 2020 Ciovacco.png

Therefore, it might be helpful to know how stocks performed after spreads reached 7.42% in the four previous cases. In the table below, notice stock market performance varied significantly in the recession cases (2000 and 2008) versus the non-recessionary cases (2011 and 2016). In two of the four cases, stocks were close to making a final low, something that is much more realistic given the Fed’s unprecedented moves announced Sunday evening.

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