Promises, Promises

Promises, promises.  Stocks rebounded yesterday on hopes that the Administration will provide relief for virus stricken workers and companies. Treasury yields swung wildly upward continuing their unprecedented behavior.

 

N O T E W O R T H Y

 

Actions, not words.  The time appears to be now.  Surprisingly, many are just beginning to realize that the spread of the Coronavirus will have an impact on business both abroad, AND IN THE US. Actually, its not so surprising. Lawmakers are typically reactive and the majority of investors tend to take a “not here – not a problem” point of view.  Well folks, it is here and, on cue, lawmakers are lining up in front of the cameras promising help.  First, let’s take a quick look at the stock market which swung wildly upward yesterday following Monday’s record downswing. Monday’s rout was the result of a perfect storm caused by Coronavirus fears and the Saudi-led black Sunday for crude oil. According to historical results, markets tend to bounce up on days following big losses as investors swoop in to buy the dip. How long that is sustainable is another matter altogether.  It is important to note that not all market pullbacks are the same. Stocks were overvalued as they hit all-time highs less than a month earlier.  Evidence also shows that many investors have been moving money out of stocks and into more defensive investments.  What is more prevalent today than in the past are algo traders.  Algorithms are not affected by the same emotions as average investors, but rather they take advantage of human emotions.  Think about that for a second.  Swings in the market are largely the result of herd mentality as traders run back and forth with the pack.  Some do it to try to make money and others do it out of losing money. Algorithms watch these triggers closely and are usually the first ones in and out as the crowds rush.  One of the byproducts of these algorithms is the increased volatility we have been experiencing.  To compound all of this is the emergence of a new class of armchair day traders, which I have written about in the past.  Shrinking commissions and smartphone-based trading apps make it possible for a new generation of trader to be part of those swings.  Evidence of this can be found in the multiple outages reported by Robinhood, the upstart firm which courts these types of traders.  All of this explains much of the volatility we have experienced in the past few weeks.  With the VIX Volatility Index at 52 this morning, we can expect the market to move up or down by 15% in the next 30 days. So what will cause this volatility to abate and allow the markets to settle into a trend?  Unknowns have to become knowns.  I have written about this often in the past.  Markets despise uncertainty, and the Coronavirus outbreak is a superlative example of uncertainty.  People don’t really understand the virus nor can they even fathom what financial impacts will result from its spread. THE TIME IS NOW.  Companies need to be more forthcoming with the potential financial impacts from lower traffic, event cancellations, and slower sales. Some are coming forward, but it is still too few.  As more companies step up and temper their earnings guidance, more unknowns will become knowns, even though the guidance will be negative in most cases.  Now on to the Government.  The first response was the Fed’s emergency rate cut at the end of last month.  The Administration began hinting at some sort of stimulus as early as last Friday.   As the President steps up his efforts to come up with a stimulus package reports have emerged that he is considering payroll tax cuts, paid sick leave, and delaying estimated tax payments.  The President is also reportedly hoping to provide some financial relief to hard hit industries like cruise lines, airlines, and energy. Hopes for these helped stocks rally in yesterday’s session. WHILE YOU SLEPT, President Trump was a no-show at a briefing during which he was expected to announce some more details about his stimulus.  This caused a selloff in equity futures overnight.  THE TIME IS NOW. Lawmakers need to act with certainty to provide the fiscal stimulus necessary to shore up the economy.  The quicker this unknown becomes known, the quicker the markets will settle down.  On the monetary front: Fed Funds futures are factoring in a 100% chance of an additional rate cut at next week’s FOMC meeting.  On the fiscal front: lawmakers are working on package proposals, which don’t appear to be quite aligned with each other yet, though it is too early to tell.  As mentioned before, the quicker they come up with a definitive strategy, the less painful for the markets.  Actions, not words are what is needed now. For the rest of us, we need to stay focused on our long term investment strategies, stay informed, and … wash our hands.

 

THE MARKETS

 

Stocks bounced up yesterday on hopes for a stimulus package from lawmakers.  Traders quickly shunned treasuries and jumped back into stocks, pushing yield back up.  The S&P500 rose by +4.94%, the Dow Jones Industrial Average climbed by +4.89%, the Russell 2000 added +2.89%, and the NASDAQ Composite Index jumped by +4.95%.  Bonds sold off yesterday and 10-year treasury yields climbed by +26 basis points to 0.80%.  Crude oil rallied by +10.38% to $34.36 a barrel.

 

NXT UP

 

– The Consumer Price Index is expected to have slowed to 2.2% from 2.5% year over year.  If you take out food and energy, the CPI is expected to have remained constant at 2.3%.

– The Treasury will sell $24 billion 10-year notes.

 

daily chartbook 2020-03-11