Over the past several weeks, we have had one of the most interesting, precipitous market movements the United States (and Global Economy) have ever seen. We have had every corner of the market strained by the spread of COVID-19, ranging from unemployment highs to plunging equity markets.
While we have had a market bounce over the past several days due to the U.S. $2.2 trillion stimulus package, we need to focus on the road ahead. Even with markets bouncing back, if we look at the intraday price swings the Dow Jones is experiencing, we can see the volatility picking up. This level of instability seems to be the new norm in the markets.
As non-essential businesses continue to stay closed, how our economy reacts will be the focal point. Unemployment surged last week as the effects of the government lockdown trickled down into economic data, interest rates have been slashed, and we still need to absorb more of the after-effects on this market.
The Fed started by initially lowering interest rates to ensure stability. Soon after, the Fed initiated another round of Quantitative Easing, purchasing a large amount of assets (including CMBs and MBSs).
The stimulus package signed on March 27th is the largest ever in US history, totaling $2.2 trillion. The program is designed to provide support for the American labor force, unemployment coverage, support for domestic corporations and state municipalities, the healthcare industry, and to fund the Federal Reserve Emergency Lending Program.
Key Data Elements throughout the Crisis
Understanding how to Move Forward
Many are struggling to adapt to new market conditions and to see a path forward. The current situation is unique in a modern market and something that most stress tests have trouble capturing. China, where the first case of COVID-19 was found, has had the most time to recover and is significantly less negative than other countries still combating the crisis. The US also has a relatively stronger performance than most countries, which we can attribute to a new stimulus package or the fact that disease spread has not reached critical mass.
Questions are arising on how to build modern-day stress tests to capture how markets will move. Capturing risk factor movements is something that SS&C Algorithmics has been reviewing to determine how to assist clients in understanding these markets. The following examples are captured and can be utilized by our clients:
The newly designed stress tests are created to provide more modern risk factor movements than the traditional equity stresses that capture significant market downturns. Using typical risk management tools, coupled with these new stress testing techniques, are an excellent first step in enhancing risk management frameworks to protect ourselves in this new market environment.
With the slew of data coming out in the market place these days, it has become apparent that the short-term volatility we are facing is most likely here to stay for a while. New risk factors are emerging in the capital markets, and the importance of risk management has yet again come into the spotlight.
Watch our "Navigating Turbulent Times" webinar to learn more.