It is ugly!!!   The S & P 500 just had its fifth worst percentage decline in history.  It was the greatest percentage drop since October 19, 1987.  One large trading firm commented that they have tried everything to appease the anxiety…exercise, alcohol, denial, all to no avail.  The firm is now resulting to the tried and true method, commenting that similar to combat, there are now no atheists on fixed income trading desks.

Twenty times over the last 120 years the Dow completed the 20% decline that traditionally defines a bear market.  Bloomberg writes in 12 of these instances the pain kept going for another 10%, including the two before this one.

What makes today special is current plunge is the fastest 20% on record when measured from the top made less than a month ago.  The popular indices are down about 27%-28%.

Wow!  Talk about the velocity of change!

As I remarked yesterday, I believe a major reason for the sell off the last two days is the growing liquidity crisis in the bond market where I think the carnage is worse than the stock market.

Bloomberg writes there are numerous bond ETFs that are now trading at a discount to their NAV.   Bloomberg further writes the value of the bonds may be overstated in ETFs because of lack of this of liquidity.  In mark to market accounting, a bond is worth what a dealer is willing to pay for it.  The pricing algorithms for ETFs are based off of Treasuries and these algorithms are far from accurate given this lack of liquidity.

The municipal bond market is frozen.  Bids, if available for a generic 20-year AA muni are around a “3.5% basis.”  Three days ago, bids were around a “2% basis.”

One veteran 30-year muni bond trader remarked to me yesterday that this is %&#% Insane, further commenting that he has never seen something like the past two days.

The Federal Reserve is providing liquidity to ensure a smooth functioning market pledging $500 billion for a 3-month repo, vowing to repeat the exercise tomorrow, along with another $500 billion for a 30-day repo.

Bloomberg reports the Fed has ramped up the amount of cash it is prepared to inject into funding markets over the next month, promising a cumulative total above $5 trillion.  The Fed is planning plans to offer $500 billion on 10 occasions in total in the next month.

This action did little to calm the equity markets.  Can I suggest the proverbial Fed bazooka has lost its potency?

In my view the major difference between today and 2008 that today is a liquidity issue not economic issue.  It can morph into an economic issue if the hysteria surrounding the corona virus does not subside in the next 30 days.

Next week is a Fed meeting and many are expecting the Fed to slash rates to zero from 1% to 1.25%.

We are living in extreme times but this too shall pass just like every other crisis.  Today only feels worse because it is the here and now.

Commenting briefly about yesterday’s market activity, equities closed around their lows, down about 10%. It was the fifth largest percentage loss for the S & P 500 in history.   Treasuries also closed at their around their lows with the 10-year yield at a 0.90% yield and the 30-year at a 1.47% yield.

What will happen today?

Last night the foreign markets were sharply higher.   London was up 5.0%, Paris up 5.34%  and Frankfurt up 4.32%.  China was down 1.32%, Japan down 6.08% and Hang Sang down 1.14%

The Dow should open sharply higher triggering circuit breakers on the upside.   The 10-year is off 20/32 to yield 0.88% and the 30-year is off 2 ½ points to yield 1.54%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.