The Federal Reserve’s (Fed) unprecedented efforts to ease the economic hardship from the COVID-19 pandemic included a rapid return of short-term interest rates back to zero and trillions of additional balance sheet purchases. The financial market reaction to the return of easy money since stock prices bottomed in late March has been nothing short of amazing. The S&P 500 Index is up more than 30% from its March lows and the NASDAQ Composite Index is now up for the year. In likely the most extreme example of bad news for the economy being good news for markets, equity prices rose following the release of April employment data that showed the highest unemployment rate since the Great Depression.
Despite investments out the risk curve benefiting from the return of Fed stimulus, zero-interest rates are again creating pain for investors focused on capital preservation and safe sources of income. All forms of cash holdings, including money market funds, bank savings accounts and certificates of deposit, are offering less during a time when the pandemic has created extreme economic uncertainty and record-high market volatility — a period when cash is a more essential asset for most households.
When questioned about the harm zero rates have on savers during the April Federal Open Market Committee press conference, Fed Chair Jerome Powell emphasized the need for supporting the overall economy as opposed to worrying about what is good for every single person. The scales have tipped toward borrowers at the expense of savers since the 2008/2009 financial crisis, with short-term interest set below the inflation rate for all but a brief period in late 2018/early 2019.
The outlook for savers is unlikely to improve anytime soon, in a world where the pandemic has meant almost any leverage is too much for every type of borrower from municipalities to mortgage REITs. Fixed income markets are currently pricing in zero-interest short-term rates for the remainder of this year and moving slightly into negative territory next year, despite Fed Chair Powell dismissing the benefits of negative rates. I do not expect Fed interest-rate policy to cross its historical zero lower bound, but without a medical solution helping to ease the suffering and anxiety from the coronavirus, liftoff from the zero level is unlikely to happen anytime soon.
< Go to Viewpoints
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.