Extreme to Extreme… What’s Next?

The stock market prior to the current situation was pricing in perfection.  The thoughts were that US Businesses would again start to deploy new capital in new projects because of the Phase One Trade Deal, and with interest rates so low, what could go wrong?  The stock market was moving higher and higher believing all would go as planned.  We were starting to become “Extreme,” in my opinion.

Then smack, the unexpected happened, the Coronavirus.  We’re now going to the other “Extreme”!  The markets are in the process of figuring out how this will actually impact the economy in the short-term, meaning this year and are looking at worse case scenarios.  One cannot help but to listen to the opinions on the Television, view opinions on the internet and thru various means of Social Media.  This over-abundance of opinion certainly influences many people to extremes and to think about worst case scenarios.

I certainly understand that both supply and demand are going to be interrupted and will impact the economy/markets, they always do!  How much and for how long is the question.  Also how much impact will monetary policy have around the globe?  I’m guessing that we’ll see our Federal Reserve reduce the discount rate either at this months scheduled meeting or sometime prior to, if they believe it’s necessary.  I believe they will be able to relieve any stress related to market liquidity however the Fed will not influence you to jump on a plane and travel overseas.

The stock market is attempting to find a bottom, short-term at least.  This bottoming process typically takes time and makes most investors bad guessers.  I would not be surprised with a little rally and then a move lower on the major indexes until we have more information about the true economic impact as well as progress to containing and developing a vaccine for this disease.

Markets Last Week

I’ll start with the positive; the Barclay’s Aggregate Bond Index rose 1.26% last week and is now up 3.76% for the year as money rotated out of stocks and into bonds.

The S&P 500 dropped (11.44%), the Dow (12.26%), the Nasdaq (10.54%) and the Russell 2000 (12.01)%  Overseas the Developed Market MSCI EAFE Stock Index lost (9.55%) and the Emerging Market Index dropped the least, losing (7.23%).

The S&P 500 is down (8.27%) for the year as of last Friday.

US Treasury yields are sinking fast as money rotates into these low paying bonds and the anticipation of our Fed lowering rates.  The yield on our 10 Year US Treasury was 1.14% last Friday, down from 1.91% on January 1, 2020.  As I’m typing, the yield has dropped further to 1.064%.  Are we heading to 0%?  I certainly hope not and that calmer minds prevail and realize that after this situation is calmed, people will still want to go to nice restaurants, go on vacations, and continue their appetite for consumption.

Election Thoughts

Perhaps we now have an actual race to see who will be the Democratic nominee for President as Joe Biden gained momentum over the weekend.  Sanders, Biden and I would not rule out Bloomberg as the 3 main competitors that can all stay around for a while.  I did read a quick article that if the Coronavirus does get worse, many of the rallies would have to be cancelled and that advertising would become the main source of soliciting votes. That certainly bodes well for anyone with a deep wallet!

For President Trump, the Coronavirus could not come at a worse time.  Prior to this, the economy and markets were all moving forward and most people believe that it’s challenging to not re-elect an incumbent during prosperous times.  So for Trump, I believe his fate may be dependent on how quickly this virus is contained and how much GDP (Economic Activity) decreases between now and November.

 

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