Published March 6, 2020
The stock market runs on narratives. The story of the 4th quarter was one of a Fed on hold while corporate earnings recovered and the trade tiff with China was mostly cleared up. Stocks pushed higher on that story until mid-January. The coronavirus upended the notion of a global economic recovery but initially had little impact on U.S. markets. As the virus spread, the market’s positive narrative came undone. Companies began warning of softer sales, thus putting at risk the story of a corporate earnings recovery. Earnings estimates came out projecting zero growth for the year. Stocks tumbled, rebounding a touch on the prospect of a globally-coordinated central bank intervention. When central banks told markets there was actually little they could do at this point, stock investors were disappointed. Small-cap stocks have fallen back to where they were 18 months ago, another failed rally for that index as the chart below shows.
The bigger issue for investors now is that the central banks of the world are reaching the limits of their fore-power. With global interest rates at historic lows, and some countries sporting negative interest rates, the impact of reducing already low interest rates even further has little stimulative impact. This hands the economic stimulus baton back to governments to enact spending programs as a means of giving thrust to the economy. Or just riding out the storm to brighter days.
In the near-term, the effects of the coronavirus will need to become clearer for the stock market to move higher. If the economy falters, there will be significant incentive, in an election year, for the government to enact some form of stimulus. It’s also entirely possible that the coronavirus has been the pin that has popped this market balloon and a period of some repair is needed before a new uptrend emerges. At a minimum, the election cycle will create enough uncertainty for investors in the summer and fall to keep them from going all-in.
Investors have a couple of choices then: be very “tactical” with a long/short trading approach and/or focus on the one certain narrative in the market: ultra-low interest rates. The latter explains the strong support for bonds and income-focused choices like utilities and real estate. The former is our bailiwick here at TimingCube.
Another volatile week for investors as coronavirus fears continued to plague markets. Stocks surged higher Monday on announcements from a variety of global health and finance agencies intended to reduce panic and support markets and economies. The S&P 500 shot higher by +4.6% on the news. The Federal Reserve took an emergency interest rate cut Tuesday, which initially added to market optimism. However, the limits of the Fed to really alter the effects of the crisis sank in quickly leading investors to sell the news. Bond markets had already taken interest rates markedly lower. So the Fed action provided nothing new in the end. Stocks tumbled -3.8% Tuesday. Stocks responded to something other than virus fears Wednesday. Results from the Super Tuesday Democratic Party primaries proved positive for Joe Biden, who is viewed as a more market-friendly candidate than Bernie Sanders. Mr. Biden’s strong showing along with the passage in Congress of a bill funding coronavirus efforts appeared to assuage investors leading stocks to close +4.2% higher. But virus fears returned Thursday as investors confronted another round of company actions designed to minimize employee exposure. Conferences have been cancelled, employees told to work from home, and schools closed as government and corporate leaders seek to minimize the spread of the disease. The impacts on the economy sent stocks reeling once again, this time with a -3.4% loss. Noteworthy was the drop of the U.S. Treasury bond rate below 1%. The bond rate began the year just shy of 2%. The decline in interest rates as investors flood into the safety of bonds reached a fever pitch Friday. The 10-year yield plunged to 0.7%, its 15th drop in 16 trading sessions. Yields have dropped by more than half in just over two weeks, a breathtaking move. In concert with that move and perhaps part of its cause was a failure of OPEC and Russia to agree to oil production cuts. OPEC has pushed for the cuts to shore up oil prices in the face of dwindling demand as coronavirus fears cripple consumption. Stocks slumped -1.7% Friday, but were down about twice that at their worst levels of the day. Oil prices were crushed, falling -9% Friday alone and down -30% year-to-date. Markets paid little attention to a strong monthly jobs report feeling that the information did not include any virus effects.
Huge volatility continued to unnerve investors this week though stocks ultimately managed a positive close. The S&P 500 (SPY) eked out a +0.41% weekly gain while the Nasdaq 100 (QQQ) closed higher by +1.08%. Smallcap stocks (IWM), more impacted by the weakness in energy and bank shares, slid -1.32% over the week.
Warm wishes and until next week.