Volatility in domestic equity markets continued this week as Americans’ renewed fears on the potential of a second mass lockdown drove erratic trading. The divide continues to widen between the “V-shaped recovery” crowd and those who believe stocks’ recent recovery doesn’t mark the end of the virus. With hotspots of COVID-19 cropping up in places like Florida, Oklahoma and as far as Beijing, it appears the virus’ impact on investors’ decision-making isn’t going anywhere.
For some domestic industries, volatility is being driven from speculation of survival rates, driving riskier investors towards financial derivatives such as options and swaps on individual companies whose share prices have, in recent months, reflected the dramatic impacts of the virus. Such companies as Hertz Global Holdings (NYSE:HTZ) have seen dramatic intra-day share price fluctuations as speculative investors and traders rush in to place their wagers on the failing car rental company’s survival - the riskiest bet of all. Other industries such as cruise lines and casinos have seen wild share price swings for individual equities too, as Americans decide which industries have what it takes to survive in a post-coronavirus world.
Although the Federal Reserve has been decreasing the level of its weekly securities-purchasing, its balance sheet has ballooned from under $4.2 trillion to over $7.5 trillion since early February. Over the same time frame, the secured overnight rate in domestic debt markets has decreased from 1.60% to 0.08%, encouraging liquidity-providing transactions such as repurchase agreements, according to the Federal Reserve Bank of St. Louis.
This past week, Fed Chairman Jerome Powell explained his intentions to begin the purchases of “broad and diversified” corporate bonds, according to the Fed’s website. The briefing described the decision to increase credit market liquidity by an estimated $75 billion as a complement to previous Primary Market Corporate Credit Facility - the Fed’s initial credit market funding backstop. Both measures aim to maintain the smooth operations of credit, especially short-term borrowing, for firms significantly impacted by the effects of COVID-19.
News of the Fed’s decision to increase its open market operations further comes after the May jobs report reported by the Bureau of Labor Statistics earlier this month. The BLS measured an addition of 25 million non-farm payroll jobs in May coupled with a reduction in the unemployment rate to 13.3%, still historically high. Although the jobs report inspired hope within the Trump administration, which touted the resilience of the American economy, Powell was quick to assert his opinion that these economic gains must be treated as revocable. With a re-introduced lockdown, the resulting economic damage could be devastating. Powell has applauded Congress’s move to pass emergency-measure spending legislation such as the CARES Act in March which provided loans to small business employees, preserved essential jobs, among other things. Powell’s comments rang distinctly in the ears of many analysts and economists as it is custom for Federal Reserve bankers to remain neutral on fiscal policy measures to promote the institution’s independence.
Equity valuations’ dramatic recovery in the last several weeks have been puzzling for analysts and investors alike. A rally among value stocks and tech stocks have kept the market marching on. Yet fears of COVID-19’s impact on financial markets and the timing of an economic recovery have revived previous high volatility seen at the start of the lockdown.