Extraordinary Market Events:
- Implied and realized volatility in both stocks and bonds has ramped to levels not seen since the global financial crisis.
- Equity markets officially entered bear market territory, with key benchmarks down over 20% from mid-February highs.
- The entire US Treasury yield curve briefly traded below 1%, as the 10-year bond breached 0.40% and set all-time lows.
- Oil has fallen 48% year-to-date as a pricing war between Saudi Arabia and Russia compounds global demand concerns.
Aggressive Monetary Policy Response:
- 2/28/20 – In a short statement, Chair Powell acknowledged how “the coronavirus (COVID-19) poses evolving risks to economic activity,” and the futures market focused on “act as appropriate” messaging to price in near-term cuts.
- 3/3/20 – With its first emergency action since October 2008, the FOMC unanimously voted to reduce the Fed Funds rate by 50 bps, bringing the targeted range down to 1.00% to 1.25% ahead of their planned meeting on March 17-18.
- 3/12/20 – To address “unusual disruptions” in the US Treasury market, the Fed announced that it would supply $1.5 trillion of temporary liquidity through repurchase (repo) operations in order to purchase securities across the range of maturities.
- 3/15/20 – With a statement in lieu of an official meeting, the FOMC cut the Fed Funds rate by another 100 bps, lowering the target range to 0.00% to 0.25%. Vowing to utilize its “full range of tools to support the flow of credit,” the Fed will also expand its balance sheet by at least $700 billion in coming months with direct purchases of US Treasury and Agency MBS securities. In an effort to promote lending, related actions reduced reserve requirements for US banking institutions.
Economic Impact Remains Uncertain
While “the US economy came into this challenging period on strong footing,” economic activity will be negatively impacted as expansive infection is met with swift and severe containment measures. Forecasters now expect the economy to fall into a recession during the first half of 2020, with the shape of the recovery ultimately determined by the success of health care experts and the critical response from fiscal policy makers to assist effected businesses and households. With the economic outlook changing so rapidly, the FOMC itself decided not to produce any updated summary of economic projections but committed to remain highly accommodative “until it is confident that the economy has weathered recent events and is on track” to achieve its goals of maximum employment and price stability.
Disclaimers:
The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third party data or the financial information contained herein. Certain information herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “expect”, “anticipate”, “project”, “estimate”, or any variations thereof. As a result of various uncertainties and actual events, including those discussed herein, actual results or performance of a particular investment strategy may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making investment decisions. ACG has no duty to update or amend such forward-looking statements. The information presented herein is for informational purposes only and is not intended as an offer to sell or the solicitation of an offer to purchase a security.
Please be aware that there are inherent limitations to all financial models, including Monte Carlo Simulations. Monte Carlo Simulations are a tool used to analyze a range of possible outcomes and assist in making educated asset allocation decisions. Monte Carlo Simulations cannot predict the future or eliminate investment risk. The output of the Monte Carlo Simulation is based on ACG’s capital market assumptions that are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Capital market assumptions based on other models or different estimates may yield different results. ACG expressly disclaims any responsibility for (i) the accuracy of the simulated probability distributions or the assumptions used in deriving the probability distributions, (ii) any errors or omissions in computing or disseminating the probability distributions and (iii) and any reliance on or uses to which the probability distributions are put. The projections or other information generated by ACG regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Judgments and approximations are a necessary and integral part of constructing projected returns. Any estimate of what could have been an investment strategy’s performance is likely to differ from what the strategy would actually have yielded had it been in existence during the relevant period. The source and use of data and the arithmetic operations used for calculating projected returns may be incorrect, inappropriate, flawed or otherwise deficient.
Past performance is not indicative of future results. Given the inherent volatility of the securities markets, you should not assume that your investments will experience returns comparable to those shown in the analysis contained in this report. For example, market and economic conditions may change in the future producing materially different results than those shown included in the analysis contained in this report. Any comparison to an index is for comparative purposes only. An investment cannot be made directly into an index. Indices are unmanaged and do not reflect the deduction of advisory fees. This report is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
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