2.
Broker Check

One Week's Change!

March 02, 2020
Share |

One week has turned the entire financial world upside down and now everyone is scratching their heads wondering – what’s next?

Coming immediately off an all-time high, in rough numbers the S&P 500 sold off 15% in about a week - which is nearly unprecedented. The entire year’s gains were more than given up in just a few trading days. Market participants are completely on edge and international economic numbers are going south. True to Wall Street form, the blame will be placed on the Corona Virus. How much of that is simply a market excuse for already weakening economic numbers is up for debate.  However, the reality of the matter has been a wicked market pullback and we all want to know if this is a dip to buy or not.

One week has turned the entire financial world upside down and now everyone is scratching their heads wondering – what’s next?

Coming immediately off an all-time high, in rough numbers the S&P 500 sold off 15% in about a week - which is nearly unprecedented. The entire year’s gains were more than given up in just a few trading days. Market participants are completely on edge and international economic numbers are going south. True to Wall Street form, the blame will be placed on the Corona Virus. How much of that is simply a market excuse for already weakening economic numbers is up for debate.  However, the reality of the matter has been a wicked market pullback and we all want to know if this is a dip to buy or not.

Given the extreme 5-standard deviation below the 50-dma, combined with the massive short-term oversold condition, it is very likely we have seen the bulk of the correction on a short-term basis. Obviously, this is not an absolute statement, promise, or guarantee. It is simply our best guess.  If there is a major outbreak of the virus in the U.S., or the Fed fails to act (lower interest rates or add MORE to its portfolio) another wave of selling could easily be sparked. 

As for the question to whether this is a buying opportunity, it really depends on your situation. For longer-term investors, people close to or in retirement, or for individuals who don’t pay close attention to the markets or their investments, this is NOT a buying opportunity. 

Anyone buying now should be prepared to – in relatively short order, meaning maybe the next few trading days, sell what they bought back to the marketplace. There is currently EVERY indication given the speed and magnitude of the recent decline, that any short-term reflexive bounce will likely fail. Such a failure will lead to a retest of the recent lows, or worse, the beginning of a bear market brought on by a recession. Our primary concern is that the impact on the global supply chain in China, South Korea, India and Japan will have much more severe economic impacts than currently anticipated which will likely push the U.S. economy towards a recession later this year. Importantly, the global supply chain is an exogenous risk that monetary interventions from Central Bankers excited to print money can NOT alleviate.

Central Bank responses world-wide are likely to be more of the same – stimulus by any means necessary – first using their tool of lowering interest rates. Here is a chart produced by Goldman Sachs estimating upcoming rate changes and the market pricing of such changes…

So, this estimate includes a cumulative 100bp of cuts in Canada, 50bp in the UK, Australia, New Zealand, Norway, India and South Korea, and 10bp in the Euro area and Switzerland. In coordination with this, the Bank of Japan has already announced an acceleration of its purchases in the Japanese stock market (it already owns 80% of the ETF stock in the country!) Most market participants are expecting the short-term rates that the FED controls to be cut back to essentially zero where they were for most of a decade after the 2008 crisis – after this immediate .5% rate cut predicted by Goldman. This is an amazing “all hands-on deck” engineering by the world’s central banks to react to a virus. Clearly the world’s stock and bond markets are becoming too dependent on the intervention of and manipulation of the bankers at the top of the food chain.

Will the FED begin stock purchases like the Japanese? Of course, we don’t know the answer to that question, but that likely would not happen unless there was considerable continuation of the carnage of last week. In the meantime, we will remain in conservation mode. Next up on the radar is the FED meeting March 18th. Stay tuned…

Regards and good investing!