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Stocks Slip & Fall On Fed Stance

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Euphoria can sometimes cloud the mind and keep you from seeing the bigger picture. The blissfully bullish sentiment that preceded May’s blockbuster jobs report was still being YOLO’d through message boards and trading forums when Jerome Powell took the stage for, what some would describe as, a disappointing, yet fairly predictable, Fed announcement.

Once the Fed’s scheduled 2-day meeting concluded Wednesday afternoon, Fed Charmain Powell held a press briefing to issue a statement and share the committee's findings. According to the FOMC (Federal Open Market Committee), even with the massive, and overall unexpected, spike in jobs last month, the US economy has still lost roughly 20 million jobs since February, and they expect the unemployment rate to close out the year at around 9.3%.

In addition to that, Powell announced that the Fed is in no way even thinking about considering raising interest rates right now, and we shouldn’t expect to see another rate hike until 2023. This really isn’t much of a surprise, considering we’re coming off back-to-back unscheduled rate cuts. And keep in mind, low rates are good for struggling economies, they’re supposed to encourage growth. 

A full economic recovery in the US is going to take some time. In a reasonably direct way, Powell went on to say that while the big jobs number was an unexpected but welcome surprise, the Fed is still looking to see GDP drop significantly in the second half of 2020, and then steadily rise again throughout 2021.

Even though the Fed says it is not capable of supporting the full weight of the US economy, it’s reported that Powell has been exerting some pressure on Congress to issue another round of stimulus, so it would appear that the Fed will continue to print money for the time being.


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Market Reaction

Equity markets did not take kindly to the Fed’s dovish tone. By the time the 8:30 AM CT bell rang Thursday morning, the S&P 500 futures were down more than 70 points, the Nasdaq-100 futures, after settling above 10K for the first time in history, had dropped more than 200 points, and the Dow futures lost a whopping 900 points.

The gut-check that equity traders woke up Thursday morning turned out to be just the tip of the iceberg. As economic fears were being absorbed by the market, new fears surrounding a second wave of Covid-19 infections were being piled on top. News of the 2 millionth confirmed case of the novel coronavirus in the US added little extra fuel to the panic selling, which ultimately drove stock prices to their lowest single-day loss since march. The Dow went on to close out the day down -6.9%; the Nasdaq dropped -5.3%; the Russell 2K got smoked, losing -7.9%; and the benchmark S&P 500 fell -5.9%. Pretty ugly.

Another impressive tale-of-the-tape comes from the CBOE Volatility Index (VIX). After reaching extreme levels just 3 months ago, the VIX, which measures implied volatility based on S&P 500 options, had tapered off in recent months, and was settling in comfortably below 30 when the Fed news hit. All of the worries over economic growth, stock valuations and virus infections came flooding back, rallying the VIX to its highest level since late April, and its largest one-day percentage increase in 2-years.

Headline Risk Is Back, For Now

Every point that the Fed touched on during its recent meeting is important, and as these stories continue to develop, the headlines will come pouring out. Public focus is beginning to shift back to Covid-19 and the economy, and with the recent popularity surge in retail trading, the predator algo programmers will be working overtime to earn their bonuses.

It’s probably a good idea to start thinking about tightening up your risk parameters. We all saw how unforgiving the markets can be when you get caught on the wrong side of a volatile swing.

 

With the recent spike in volatility, we want to make sure you remain aware of the system of circuit breakers the CME Group has in place. According to the CME’s price limits guide, there are 4 tiers of “circuit breakers” before trading is permanently halted for the day.

  • Tier 1: 5%
  • Tier 2: 7%
  • Tier 3: 13%
  • Tier 4: 20%

Tier 1 applies only to the overnight Globex session, which occurs between 5:00pm and 8:30am central time. Tiers 1, 2 and 3 apply to regular trading hours, from 8:30am to 3:15pm central time. 

Once prices trade below the 7% circuit breaker, trading will be halted for 15 minutes while limits are extended. This process repeats for Tier 3 when prices drop below 13%. In the event the market drops below the 20% level, trading will be permanently halted for the day, and the market will reopen at the start of the following day's session.

Remember, keep an eye out for headlines, and start thinking about adjusting your strategy to factor in the increased volatility. Trade well! 

 

Posted by John D. on June 12, 2020
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