1st Quarter 2020
The fear of the coronavirus has finally invoked a reaction in the markets. The recent volatility in the markets has been unprecedented. The drop over the past week is the quickest 10% correction for the Dow Jones Industrial Average on record. It was only 10 days ago that the market made a new all time high. The fear of the unknown unknowns has caused a reduction of investor risk. It has pushed the yields on the 10yr and 30yr Treasury bonds to record lows. The risk of an economic slowdown has caused analysists to reduce their expectations of corporate earnings for the coming year. A few of the Large Cap Growth stocks, that were the darlings of the rally, have warned that they are experiencing supply chain disruptions that limit their production.
The US economy is a consumer driven economy. Roughly 65% of it is derived from consumer activity and the balance from manufacturing, so consumer confidence is important. I believe that the current market activity reflects a fear that should the virus expand in the United States, consumer will pull back on their spending and companies will experience a drop in demand for their products.
Another contributing factor, in my belief, is a development in the Presidential election. The President has made the economy a measure of his policy success. Should the economy slow going into the fall, there is a belief that it might strengthen the Democratic chances in the election. The current front runner for the Democrats has expressed some policies that some analysists believe would lead to a selloff in equity prices. There may be some positioning going on that reflect this.
(Please note this is not meant to be a political statement but an observation.)
Market participants are expecting a coordinated response from Central Banks to the market selloff. The People’s Bank of China has already begun infusing liquidity into their system. The Fed Funds futures market is currently pricing in better than a 50% chance of 3 discount rate cuts by the Federal Reserve by the fall. It is not clearly evident that this will alleviate the problems. It would be more of an attempt to boost confidence.
The markets are closing in on some important technical levels. The drop in rates should be good for consumers. Lower mortgage rates should allow for refinancing and the lower energy prices should lead to lower gasoline and heating prices. Assuming the virus doesn’t develop into a pandemic (an epidemic that speads across a large region) some analysts expect an economic drag the first half of 2020 with a bounce back in the later half due to pent up demand.
Corrections in the markets are not uncommon and can assist to reduce excess that may exist. Cash is held in the portfolio to buffer against these possibilities and to be deployed on reallocation of assets consistent with the risk profile. Investing is for the long term and is never a straight line up.
As an aside, I would like to remind you to be diligent in this flu season. The CDC has suggested that getting a flu shot, even this late in the season, is helpful. Along with basic things such as hand washing, hand sanitizer, keeping your hands away from your face and maintain your personal space are all small preventive measures to limit the transmission of bugs. I’m not trying to be an alarmist, just a realist. Every little thing helps.
As always, please feel free to contact me with any questions or comments.
The opinions expressed herein are those of Riverbend Planning Group. The data and opinions are furnished for informational purposes only and should not be considered a solicitation for an investment decision. Although it is derived from sources believed to be accurate, Riverbend Planning Group makes no guarantee to the accuracy of the informationBack to Blog