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Co-authored by Jason Headings

The COVID-19 pandemic continues to impact our daily lives in a variety of ways. Recent news headlines and market volatility are making communication more critical than ever as the pandemic continues to restrict commerce around the world. The surge in jobless claims and loss of economic productivity due to the impact of the virus is unlike anything the modern global economy has seen. The market has also experienced some historic moments as well. In addition to reaching an all-time high on February 19th, the S&P 500 Index had its fastest 10 percent drop from a market peak in history, in only 6 days. It then proceeded to have its fastest 20 percent drop in history, in 16 days, followed by its fastest 30 percent drop in history in only 22 days. For the month of March, the market moved up or down nearly 5 percent per day, by far the largest average daily move for any month in history.

Government Stimulus
To try and stabilize markets, the Federal Reserve continues to be extremely aggressive in their attempt to provide economic relief by implementing measures to increase the money supply in the economy. Their preferred method of impacting monetary policy is adjusting the level of short-term interest rates. The Fed utilized this approach and cut the overnight lending rate between banks by a total of 1 percent, to a target range of 0-0.25 percent and stated that the committee would keep rates at that level until the economy weathered the effects of the COVID-19 virus. The Fed stated a normal level would be determined by using figures that showed the U.S. had reached maximum employment and maintained its goal of price stability. To assist the economy, Congress passed more than a $2 trillion spending package aimed at flooding the economy with liquidity. Since then, the S&P Index rallied higher and posted its largest 100-day gain in history with +50 percent returns. But after all this stimulus, one question remains.

What if it is not enough?

What if all the measures that the Federal Reserve has taken do not get the U.S. to attain full employment? What if all the unprecedented levels of cash that flooded the economy are not enough to maintain a modest level of inflation? Many investors fear that the only arrow that the Fed has left in their quiver, is to introduce negative interest rates. As shocking as this sounds to many, some fear that it is inevitable.

Negative Interest Rates
What are negative rates? The concept is just as it sounds. It is thought-provoking but is relatively simple in its execution. The goal is to spur inflation by encouraging substantial levels of borrowing and spending. To help illustrate this concept, consider the following example.

If a borrower takes a 1-year loan of $100,0000 from a bank, with an interest rate of -3 percent, at the end of that term, the investor will only be required to pay back $97,000 of the original principal! This makes it extremely attractive for those that are borrowing money, but not those lending.
There are several unintended consequences of negative interest rates that could occur.

• Banks and other lenders are disincentivized to lend money. Every loan they make would be at a financial loss. For the same reason, it would also likely cause banks to not keep their excess reserves with the Fed, but instead, house their cash on-site in their vault.
• Investors that need to generate income from fixed-income investments income would suffer greatly. Each year, they would be guaranteed to lose a portion of their principal. The main reason someone might still choose a bank to deposit their money would be to pay for the safety of FDIC insurance.
• Negative rates could also cause a run on the banking system if people chose to withdraw their money over a short period of time. If we assume that the physical safety of cash is not an issue, in this scenario, it will also make it much more difficult for the Fed to determine how much physical currency remains in circulation.

There are only a handful of central banks in countries around the world that have implemented negative interest rates. In 2009, Sweden was the first to implement negative interest rates. In 2012 Denmark followed, along with Switzerland and the European Union in 2014. Most recently, Japan dropped their interest rates below zero in 2016. Unfortunately, the economic impact of negative interest rates in these countries remains very unclear. While the Federal Reserve has repeatedly stated that they have no intention of implementing the policy in the U.S. to stimulate the economy, only time will tell if they will be forced to use this financial experiment as a last resort.

2020 U.S. Presidential Election
On top of experiencing a global pandemic, 2020 is also a U.S. Presidential Election year. When looking back at history, there are some market trends during presidential years that have developed. One of these is The Presidential Theory Cycle that was developed by Yale Hirsch. This theory suggests that after a President wins an election, during the first two years of office the stock market’s returns are generally below average as campaign promises are being fulfilled. The stock market typically experiences returns above average in the last two years of office as the Presidential candidate shows political compromise for re-election.

While no one can predict the future, the stock market has historically been a good predictor of U.S. Presidential election winners. Since 1928, in the 3-months leading up to an election, when the S&P 500 Index is positive, the incumbent party typically wins. On average, the S&P 500 Index has risen 5.04 percent when the incumbent wins and has fallen -1.93 percent when the incumbent party loses. This scenario has accurately predicted election winners in 20 of the last 23 elections, which is an accuracy rate of 87 percent.

Political Control of Congress
In addition to the Presidential election, the political control of Congress also impacts stock market returns. Since 1950, regardless of what party won the Presidency, the stock market’s performance has been higher when neither political party had complete control. A split Congress generally produces gridlock, which tends to reduce uncertainty for investors by preventing abrupt and unexpected change.

Have A Plan
Regardless of what happens for the remainder of 2020 and beyond, it is important that each District have clear investment objectives and parameters established. This will help prevent short-term volatility from impacting long-term plans. Whether you get assistance from an investment advisor or implement a program internally, each District is unique and these guidelines will ensure that the investment program stays on track, even during trying times.


Jason Click, President, Public Funds, Meeder Investment Management
O (614) 760.2120 | M (614) 357.0934 | jclick@meederinvestment.com

Jason Headings, Sr. Vice President, Director of Fixed Income, Meeder Investment Management
O (614) 760.2111 | M (937) 935.4569 | jheadings@meederinvestment.com



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