The stock market continues to swing wildly as investors and traders attempt to understand the long-term impact of COVID-19 amid the various responses to contain the economic damage. And that volatility is likely to persist as the lag in economic data forces market participants, which include policy makers, to make decisions off of incomplete information.
“This, of course, is what makes it so difficult for the Fed,” Deutsche Bank’s Torsten Slok said on Yahoo Finance’s The Final Round on Monday. “This is why the Fed is not talking about in terms of what the numbers are showing. It's really more talking in terms of an insurance cut.”
The world’s central banks have attracted a lot of attention recently. Currently, market expects the Federal Reserve to cut interest rates by 50 basis points this month in an attempt to provide financial relief to businesses that may suffer short-term cash flow problems as spread of the virus shuts down economic activity.
While they could wait for economic data reports to confirm the current concerns, they would also be risking being too late. This is why economists are characterizing these pre-emptive monetary policy measures as “insurance” cuts.
The risk of an insurance cut, of course, is that the Fed provides too much stimulus.
“What if that thing that they're taking insurance out against is not happening?” Slok said. “Then it is going to look a little bit awkward, quite honestly, when they come back and say, ‘Well, that didn't really happen, so now maybe we can quickly turn rates back up.’ So the issue here becomes that volatility is going to be elevated for some time.”
Last week, Quad Group’s Peter Borish told Yahoo Finance that some of the biggest bounces in the stock market happen when the market is actually trending lower.
Slok’s argument for persistent volatility provides some fundamental rationale for why this happens.
And so, such is the nature of financial markets, which in the short-term swings amid uncertainty, while also rewarding long-term investors who are able to stomach the volatility.
[See also: Coronovirus and travel: What you need to know]
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Sam Ro is managing editor at Yahoo Finance. Follow him on Twitter: @SamRo
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