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COVID-19 Spikes Remind Investors

June 21 marked the 100th day since the World Health Organization declared the outbreak a pandemic, triggering a massive selloff in equities in the subsequent week. In response, the Federal Reserve took several actions including cutting interest rates to zero, launching a $700 billion quantitative easing program as well as taking a series of measures some of which were aimed at implementing provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.i Its latest action was last week’s initiation of purchase of up to $250 billion in individual corporate bonds.ii

The “Fed Put”

The recovery rally that followed has been driven by the “Fed Put.” The Fed Put is the widespread belief that the US Federal Reserve can always rescue the economy by taking actions such as decreasing interest rates and quantitative easing.iii These policies, which run directly through the financial markets, are designed to fundamentally increase the value of asset prices. With the Fed underpinning valuation, investors focus on growth opportunities rather than capital preservation in times of economic duress.

With the mindset that the Fed Put is firmly in place, investors have focused on technology companies since the onset of the current recessionary period. Throughout the last 100 days, there have been pullbacks, including a significant selling on June 11. However, growth stocks led by technology companies have been the first to recover, helping to provide a floor for the markets and keeping the pullbacks shallow.

“Quadruple Witching”

Settlement data shows that fast money investors continue to drive volumes in the equity markets. In addition to trading on the latest COVID-19 and Fed news, last week’s trading was driven by “quadruple witching.” Quadruple witching occurs four times per year in March, June, September and December. It refers to a date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. Ahead of the expirations, investors look to unwind futures and options contracts that are profitable. With this activity in mind, fast money investors and arbitrageurs drove trading throughout the week, looking to take advantage of the increased volatility due to quadruple witching.

This commentary is provided for general informational and/or educational or discussion purposes only, is not intended to offer legal or investment advice, and may not be relied upon as legal, investment or any other advice. If you have a specific question regarding a particular legal issue, you should consult a legal professional.
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