Last week I summarized how past buying opportunities emerged after previous VIX levels reached various extreme levels. This week, I am sharing a chart I built back in 2011. Over the last eight years I have used this chart to kept track key Federal Reserve policy actions. This week, I went back and updated the chart and added yellow dots to highlight where the VIX first hit +40 before going back down to historical normal levels (i.e. <20).
The chart below starts in 2007 when the Fed Fund rate was at 5.25%. By the time the great recession selloff was nearly over, the Fed had reduced the rate to effectively zero (12/2008) and began multiple “QE” or Quantitative Easing programs. Looking back, once Fed Fund rate hit 0.25% in late 2008, it stayed there for nearly 7 years. Fast forward to today…as of last month, the Federal Reserve responded to the Covid-19 health crisis by slashing rates from 1.75% to 0.25%.
What can we learn about past market stresses and policy response? Furthermore, what lessons from the past could perhaps apply today?
What the chart tends to support is that, as in the past, whenever the VIX first hit 40 the Federal Reserve was active in either dramatic rate cuts or other supportive policy programs. The higher the VIX = more active Fed measures.
Some of those most well-known past programs were:
Late 2008 to 2016 – ZIRP, QE1, QE2, Operation Twist, QE3, Taper Program.
ZIRP – Zero Interest Rate Policy is a macroeconomic concept describing ultra-low interest rate, such as the Federal Funds rate.
QE1 – Fed buys $100 billion of agency debt, and $500 billion of MBS (mortgage backed securities)
QE2 – Fed buys $600 billion of long-term treasury bonds at $75 billion per month until mid-2011
Operation Twist – Fed buys $400 billion worth of long-term treasuries and sells treasuries with short-term maturities.
QE3 – Fed buys $40 billion per month of MBS.
Taper Program – Fed gradually reduces bond-buying program until halted in October, 2014.
2016- 2018 – 9 consecutive Fed Fund rate hikes, peaking at 2.5% in Dec. 2018
Covid-19 response measures: Late 2019 – present day
August, 2019 – March, 2020 4 consecutive Fed Fund rate cuts.
March 3rd, 2020 - Increased repo offerings by $75 Billion, then increased again on March 11th.
March 12th, 2020 – Extended maturity distributions and increased repo operations, again.
March 17th, 2020 – CCCF “Commercial Paper Funding Facility” established.
March 18th, 2020 – MMFL “Money Market Mutual Fund Liquidity” facility launched.
March 20th, 2020 – Provided additional liquidity to MMFL for municipal money funds.
March 23rd, 2020 – Announced Treasury purchases in primary and secondary credit facilities.
March 27th, 2020 – 2 Trillion of Aid included in CARES Act.
April 9th, 2020 – Provided 2.3 Trillion of additional loan facilities for households and employers.
This is a lot of review, however, I went into such details to stress my next point. Despite all of the “success/fail” debate and noise around policy responses coming out of 2008, the S&P 500 was up nearly 400% from the lows of 2009 to the highs we set late February of this year. Patience was rewarded for those that exercised discipline and stuck to their long-term investing and planning goals. Was it easy? Heck no and it’s not supposed to be either. Look at the chart above again, and note all of the policy action and volatility during these times. Understanding this, you can appreciate how difficult it is for most investors to handle their emotions.
- The Federal Reserve and Treasury responses over the last 5 weeks has been historic, dramatic, and breath-taking.
- So can be said of the Covid-19 virus impact, both mentally and financially.
- Time will tell just how bad the financial and health damage will be once this is over.
- Expect more policy responses to come.
- Be patient, stick to your plan and consider your choices carefully when making investment decisions.
If history does indeed rhyme, the market will begin to climb the wall of worry once again. In the world we live in today, the old saying of “Don’t fight the Fed” still rings true.
Let’s talk about history and appreciate what we can possibly learn from it. Call me at 515-457-2930.
Definitions and Data Sources The Volatility Index, or VIX, is an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options. This volatility is meant to be forward looking, is calculated from both calls and puts, and is a widely used measure of market risk. The VIX is often referred to as the "investor fear gauge.”
Historical S&P data is adjusted (for dividends and splits)
Past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in the study will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information continued in this study serves as a receipt of, or as substitute for, personalized investment advice from Capital Resource Management, Diversified Financial Group, or FSC Securities. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her situation, he/she is encouraged to consult with the professional advisor of his/her choosing