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.

Ciovacco Credit Spreads Table Mar 2020.png

It is also relevant to note how serious the walk forward look was in the two cases that featured recessions (2000 and 2008 cases in table above). From Bloomberg:

The velocity of the U.S. move makes it incomparable to previous routs except the great financial crisis of 2008.

“This is happening at light speed this time, and it’s mostly because of credit spreads widening so much, it’s not about bank liquidity,” said Ira Jersey, chief U.S. interest rates strategist at Bloomberg Intelligence. “We’re pricing in a global recession of some magnitude.”

“The speed of the deterioration is important because of the shock effect, and because it makes forecasting harder,” said Torsten Slok, chief economist at Deutsche Bank Ag in New York. “We’re looking for whether people will be laid off, and if companies can roll over loans.”


While we should all respect the seriousness of this virus, it is also important to understand that things will improve at some point in the future. This week’s video takes a look at the current situation and provides some historical context, allowing us to respect present-day risks without slipping into a state of long-term despair.


Given the rare oversold state of the markets in recent days and unprecedented Fed action on Sunday evening, we will head into the new week with an open mind about all outcomes. In terms of the markets, we are not making any assumptions about anything (good, bad, or indifferent).

Our large cash position speaks to the uncertainty associated with an unprecedented deterioration in market-related data. Thus far, the market has only been able to muster a few one-day rallies. Until the market can prove something on a sustained basis, we will continue to walk forward with a defensive posture.

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