Hunkering Down

Hunkering down.  Stocks experienced another selloff amidst continuing fear of a recession.  The selling was not limited to stocks as bonds, commodities, and even gold found their way onto the chopping block.




What happened yesterday:


The selloff started well before the opening bell as stock futures hit limit down on Tuesday night.  As the session wore on, stocks were unable to gain ground as crude oil sank to levels not seen since 2002.  The President held a news conference during which he said he would invoke the Defense Production Act.  The cold war era provision would enable the Government to sponsor the ramp-up of production on items such as surgical masks, protective gear for health workers, and other medical related items.  The selling peaked midday kicking off a level 1 circuit breaker on the NYSE which halted trade for 15 minutes.  The selling continued after the pause but ultimately turned around trading up into the close as news hit the tape that the Senate passed the first Coronavirus relief bill.

Stocks, bonds, and commodities all closed off their session lows but in the red.





Q: Why is everyone concerned about a recession, isn’t this just a temporary thing? A: As more restrictive measures begin to take effect in order to “flatten out the curve” of the virus’ spread, it becomes increasingly evident that a recession is on the horizon. As Americans prepare to hunker down to fight the virus, some industries will bear the brunt of the slowdown in activity.  To provide perspective on this consider the following: Wholesale and Retail trade make up roughly 11% of GDP, Arts/Entertainment/Food Services account for some 4.2% of the GDP, Manufacturing contributes 11%, and Commercial Aviation (perhaps hardest hit) makes up roughly 5% of US GDP.  Clearly all of these things are not going to 0%, but you can see that a slowdown in activity across these industries will certainly hamper the growth of the overall economy.  The big unknown is just how long the slowdown will last.  Many analysts believe that a slowdown in the economy will last for 2 quarters, which is a technical recession.  However there will be longer lasting effects as unemployment is expected to increase rapidly resulting from the slowdown in the hardest hit industries.  Though these employees will most likely be rehired once the pause is over, getting the unemployed back to work takes time therefore the effects will most likely last into 2021.


Q: Is there any positive news about the economy? A: YES!  The economy has ebbed and flowed since before we even kept records.  Some of the contractions were longer lasting than others, but all of them gave rise to periods of growth and prosperity.  The financial crisis was brought on by a flawed banking system which was ultimately mended and today, while their stocks are under pressure, the banking system is solid and in far better health than in the past.  If the economy does go into a recession in the coming quarters it will be self-induced as we attempt to  temporarily halt activity to prevent the virus from spreading.  Once the virus is contained and restrictions are lifted, pent-up demand will drive the economy forward aggressively.  High ticket consumer discretionary purchases (e.g. electronics, homes, autos, etc) which were hampered by the shutdown will occur once consumers are able to get out.  In the the interim, consumer staples (food, beverage, household items, etc) will continue to experience demand and possibly even grow in demand.  There will surely be pain felt by those whose jobs are affected by layoffs, but hopefully the ever-increasing Government stimulus packages will lessen the blow.


Q: Why are bonds and gold selling off, aren’t they supposed to go up in times like this?  A: Though stock prices are generally attributed to corporate performance, they are occasionally governed by strong emotions.  As very few companies have offered real guidance on the impacts of the slowdown investors are left with back-of-the-envelope calculations and their emotions to guide their decisions (more the former than the latter lately).  This has led to the increase in the volatility we have been seeing.  Treasury bonds sell off for two reasons.  1) If investors believe that the economy is poised for a positive turn around causing inflation to pick up, or 2) if investors raise cash to buy other assets classes. The massive stimulus packages being vetted along with an extremely aggressive Fed will certainly cause inflation to pick up at some point in the future.  The higher yields which have resulted in the past few days will offset that inflation providing better real yield to investors.  Corporate and Municipal bonds have traded down as investors fear that the issuers may have trouble meeting debt obligations in the coming quarters.  The lack of real guidance from these non-sovereign issuers has led to indiscriminate selling akin to that being experienced in the stock market.  The good news is that information will start to come forward and investors will start buying discriminately.


Q: Stocks seem so cheap, are there any value plays out there? A: It’s too hard to tell at this point. As mentioned above, we still have very little tangible information from the companies themselves as they pivot their business models to deal with coming months.  Speculating about which ones are oversold is a risky venture with many value traps out there.  Yes, value traps.  Those occur when investors think that a company has been unfairly shunned by investors only to realize, too late, that the stock was cheap for a good reason. Without any real information, it is too risky to determine where true value might be.  As the smoke clears many companies will be cheap for the wrong reasons and some will be cheap for the right reasons.  Pro tip: avoid those that are cheap for the right reasons. That time will come, but it is not here just yet.




– Weekly Initial Jobless Claims are expected to be 220k compared to last week’s 211k. This number comes out weekly and I usually don’t post it here (though it is always in the weekly economic calendar I provide on Mondays), but as they are expected to start increasing with this upcoming economic pause, I will start reporting it to you more frequently.

– The Philadelphia Fed Business Outlook Index may have fallen to 8 from 36.7.

– Leading Indicators are expected to have grown by +0.1% in February, down from the prior month’s +0.8% change.

daily chartbook 2020-03-19

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