Markets Are Still Unsettled, and the Fed’s Actions Continue to Backfire
The bad news just keeps getting worse for investors, as stock markets continue their slide. The Dow Jones lost 10% today, dropping over 2,350 points to end the day. Not even an unprecedented monetary policy action by the Fed was able to stop the loss, so investors who are trying to stick to stock markets have their work cut out for them.
Dow futures were down over 1,200 points overnight last night after President Trump announced a ban on all inbound travel from Europe. Combined with the news that Tom Hanks has coronavirus, that two NBA players have tested positive, and that the NBA and NHL have both suspended their seasons, and markets were primed for a big day in the red.
The Federal Reserve stepped in to try to boost stock markets, with the New York Fed announcing this afternoon that, after consulting with the FOMC, it would begin $1.5 trillion in term repo operations. Let that number sink in – that’s trillion with a “T”. That’s equivalent to about 35% of the Fed’s current balance sheet. And it’s starting today.
The Fed is offering $500 billion in repo market liquidity today for a three-month operation, another $500 billion tomorrow for a three-month operation, and an additional $500 billion tomorrow for a one-month operation. Those three-month and one-month repo operations will be repeated on a weekly basis for the remainder of the month, so by the time all is said and done, there could very well be $5.5 trillion in new liquidity floating around according to the Open Market Desk’s auction schedule.
That’s 34% larger than the President’s proposed budget for FY2020, and 30% larger than the Fed’s current balance sheet. It’s also 13% larger than the entire gross domestic product (GDP) of Japan. That’s how bad a shape the US economy is in. Yet while the Fed’s actions prompted the Dow to spike by 1,300 points this afternoon, it couldn’t forestall the larger slide, and stock markets quickly dropped back. That saw the Dow’s largest point drop ever, and the second-largest daily percentage drop behind 1987’s Black Monday.
The outlook for stock markets is now dire, with markets having given up all the gains they made since President Trump took office. The Dow is down nearly 30% in just one month, a phenomenal decline, and one that has wiped out many an investor’s dreams of retirement.
Many investors who thought about getting out of stocks and into gold over the past few months are probably kicking themselves now that their investments have taken a nosedive. Now they really have to wonder whether they can afford to continue sticking to stocks, or whether investing in gold like they should have done months ago is the right move to make, before stocks lose even more ground.