Market Notebook


Market participants were indiscriminate in their selling last week of anything not bolted to the floor.  The virus pandemic and associated government response has reduced economic visibility to near zero as the actions being taken are simultaneous, world wide, and unprecedented.  Contributing to the asset selloff was the significant strengthening of the U.S. Dollar.  Assets that were expected to insulate portfolios from downside equity risk like certain bond funds and gold were sold by participants right along with equities even in the face of massive easing by the Federal Reserve.  Cash was the only asset participants wanted to own last week.

The economic indicators followed in this notebook are flashing caution.  This is obviously not surprising.  The surprising part, is that during the run up to an average recession, the indicators are expected to provide some advanced warning.  The indicators failed to provide actionable, advanced warning in this case because of the swift nature of the down turn.  Expect that the indicators will quickly move from caution to warning as they catch up with what is a government induced sudden economic stop.

During the next few weeks, expect more volatility.  The virus headlines are likely to get worse before they get better.  New York is likely to come into focus as cases begin to strain the capabilities of the region’s medical system.  Both New York and California are on the leading edge of this outbreak.  They can be used as indicators for the rest of the country.  When things start to get better in New York and California, then we will have turned the corner in regard to getting the virus under control.  Although the news headlines are very negative right now, things will eventually improve.  China is getting back to work and so will the U.S.  It is simply a matter of timing.

A recovery in U.S. markets is a virtual certainty.  The question is, when will the recovery start and how rapidly will we recover?  The answer to this depends upon how badly consumer balance sheets are affected by the measures put in place to contain the virus.  If the “lock down” continues for a few weeks then the recovery can be relatively swift.  If economic activity is stopped for months, then this down turn is more likely to resemble a typical recession in regard to timing.  Since there is little that is typical about this economic event, rules of thumb and averages from previous recessions may be of little value.  In preparing for the eventual recovery, look for assets that are trading irrationally.  Think about which companies are in a good position to weather the storm and / or which companies are likely to be quickest to recover.  Think also about how the landscape might change after this event concludes.  For example, people may be afraid to be in close quarters with other people for quite a while.

Consider that the markets are trading mostly on news flow at this point.  Continued negative news will subdue the markets while good news could easily be the catalyst for a strong rally.

Stay safe out there.

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