Market Update

Posted on March 25, 2020 by Rick Fisher Jr.

Stocks trying to add to huge gains. Futures are indicating a flat to slightly positive open as stocks attempt to add to historic gains from Tuesday on optimism surrounding eventual passage of the fiscal stimulus plan in the Senate. The Dow had its fifth best day ever, up 11.4%, which ranked as its best day since March 1933. It is important to note, however, that the largest gains ever have tended to take place during bear markets, as volatility is heightened. Additionally, the S&P 500 Index hasn’t been up back-to-back days for 28 trading sessions, tying the longest streak since World War II.

Washington strikes a deal. Congress and the White House reached a deal late last night on an estimated $2 trillion stimulus package to help cushion the economic and financial blow from the COVID-19 pandemic. Several hundred billion dollars larger than prior proposals and roughly 9% of US gross domestic product, the package provides direct financial assistance to many Americans, expands unemployment assistance, provides loans to affected businesses, and delivers significant resources for an increasingly stressed healthcare system. This package will help bridge consumers and businesses to the other side of what has become a business crisis. Unfortunately, stimulus will do little to solve our health crisis but this big step, on top of the Federal Reserve’s historic actions, may help limit the near-term downside and ensure a strong recovery once the outbreak is fully contained.

Liquidity crunch. The pandemic has caused unprecedented volatility. Last week, the CBOE Volatility Index (VIX), which measures the implied 30-day volatility of the S&P 500 based on options contracts, measured its highest reading ever. At the same time, we have seen liquidity dry up as buyers have become tentative, bid-ask spreads widened, and some exchange-traded corporate bond products traded below their net asset, or intrinsic, values. The Fed’s historic response this past weekend may help restore health to these markets, as we discuss today on the LPL Research blog.

Is cash king right now? According to data from Morningstar, investors appear to be treating money markets as king, based on fund flow data for the week of March 11. Investors essentially redeemed assets from all other categories in order to fuel additional exposure to money markets. Investors even reduced exposure to higher-quality taxable bonds and municipal bonds, indicating those categories may not feel safe enough to them in the current market environment. As we keep an eye on the factors in our Road to Recovery Playbook, this data gives us confidence that there may be limited sellers remaining in the market and investor sentiment is rather tepid at this time, as we discuss in today’s LPL Research blog.

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