Coronavirus fears, which initially seemed to be nothing more than an afterthought, have finally materialized as COVID-19 has turned into a global pandemic. This black swan event has caused global markets to sell off sharply causing investors to abandon risky assets for safe-haven securities. In less than two weeks, the S&P 500 has fallen from its all-time high an unprecedented 27%. Digital asset markets are no exception, as bitcoin has dropped 20% more than the S&P 500. Meanwhile, in energy markets, a sudden Russia-Saudi crude oil price war added to the pandemic fears and produced a sell-off causing the commodity to fall as much as bitcoin. On the other hand, gold remained nearly flat, as market participants seeking safety fled to US Treasuries causing the price of government-backed bonds to appreciate around 10%. In response to the capitulation, the Federal Reserve initially cut interest rates 50 basis points hoping to get the bulls back off the sidelines. However, traders just sold the news as the capitulation continued. Now hoping for a Deus Ex Machina rally, the Federal Reserve has unleashed the bazooka, a $700 billion bond buyback program along with a hallmark interest cut designed to target a Fed Funds rate between 0 and 25 basis points. As the monetary authorities continue to intervene to stimulate the economy, the Federal Government is also pondering a stimulus package of its own, which includes a tax rebate, a payroll tax cut, small-business grants and loans, expanded unemployment insurance and relief for the airlines and other hard-hit industries. Meanwhile, institutions continue to liquidate their holdings hoping to ameliorate their losses, while retail investors suffer the brunt of the pain as Boomers see more than a quarter of their retirement savings wiped out in a short two weeks period.
Unequivocally, there has been a shift in global markets. A shift away from a period of “stability” to a period of “uncertainty”. Passive investment strategies, which benefit from stability will suddenly stop working. However, as change punishes the old, it rewards those willing to adapt. As a result, active management investment strategies that benefit from uncertainty, like trend following, volatility carry, global macro, and statistical arbitrage will be revitalized.
As the contagion continues to spread with no avail the Federal Reserve will continue to print ad infinitum. In the interim, hoping to “lend a helping hand” to the Federal Reserve, the Federal Government will also likely intervene and launch a fiscal stimulus package of its own. However, as the Coronavirus damages global economic supply chains and stymies consumer spending, which drives approximately 70% of the US economy, this begs the question if fiscal and monetary stimulus will even be enough to counter the devastating effects caused by the pandemic? If one thing is certain, it is that uncertainty will continue to plague financial markets and while change is inevitable, adapting is a choice. How long are you willing to adhere to your financial advisor’s cliché advice “The stock market always bounces back”, while your portfolio continues to bleed?
- Edward Puccio, Digital Asset Analyst BKCoin Capital LP