Market Notebook


Market participants experienced historic levels of volatility last week as both equities and bonds rallied on the news of government stimulus plans.  Most importantly, damage in the bond complex was repaired to a large extent as perceived default risk was lowered along with easing of the U.S. Dollar against other currencies.  Bonds are now trading more in line with what one would expect.  Although equities had a good week, it is too early to say that the bottom is in for equities.  The duration of social distancing measures has yet to be determined.  The damage to the economy depends directly upon how long various “lock downs” and social distancing must go on.  In the short term, look to New York as the barometer.  Once New York turns the corner in regard to number of new cases, economic healing can begin.  Positive news at that point should help equities stabilize.  Be advised, It could be weeks before New York turns the corner.

Longer term, this pandemic will change the business landscape in the U.S. and around the world in dramatic and enduring ways.  The pandemic will create winners and losers.  It will change risk attitudes for a generation of market participants.  It will change how long term investment portfolios are constructed as the bond complex deals interest rates approaching the zero bound.  It will change the narrative on the role of government in a free economy.  And the list goes on.

In the next week more volatility is expected.  Equities are vulnerable to a pullback on continued negative news.  Treatments or vaccines are too far into the future to create a positive narrative.  The baseline narrative over the next 7 days is likely to be negative. 

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