![One Week’s Change!]()
by Greyson Geiler | March 2, 2020
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!
by Greyson Geiler | January 27, 2020
Monetary authorities across the world have slashed interest rates 80 times over the last 12 months and printed upwards of $1 trillion over four months to counter the economic slowdown that is plaguing especially the developed world. As we have mentioned in this post, the Federal Reserve has been purchasing assets and stacking them on to the balance sheet at a pace we haven’t seen since the 2008 disaster. Judging from the lackluster response of economic numbers from around the world, it seems that the only response to this flood of “liquidity” being provided by the major central banks is a stock market rocket launch to new all-time highs.
Data from Netherlands Bureau for Economic Policy Analysis (CPB) showed Friday that global trade volume continued to contract in November, marking one of the most extended stretches of negative growth since the end of the financial crisis.
November was the sixth month of straight of declines on a Y/Y basis, the longest stretch since right after the 2008 financial crisis. World trade has dropped sharply – down 3.4% from November 2018.
However, there was some good news- the rate of contraction has slowed from a -2% pace seen in October, which was the quickest rate of decline since a decade ago.
And while hope is high that the so-called ‘trade deal’ will lift all boats, data shows that the global economy has continued slowing into 2020 as the Baltic Exchange’s main sea freight index has crashed 70% in the last four months, the biggest down moves since 2008. Although this may partly be simply the front-running of tariffs expiring, but it is concerning, nonetheless.
Additionally, earlier this week, the IMF downgraded its forecast for global GDP for 2020 and 2021, its sixth straight reduction, although in a sliver of optimism, global GDP in 2020 is now expected to post a modest rebound from 2.9% to 3.3%, (down from 3.4% in October) and to 3.4% in 2021 (down from 3.6%) as the IMF said, “there are now tentative signs that global growth may be stabilizing, though at subdued levels.”
With so much of the empirical data coming out across the globe being negative, now we have the outbreak of the coronavirus that could derail investor confidence and consumer spending especially in Asia. Of course, the history of these type of epidemics has proven to be buying points historically. Courtesy of Charles Schwab Investments here is a look at the MSCI international stock index with some of the virus or flu epidemics over the last 20 years…
Of course, time will tell how serious this epidemic becomes, but keep in mind that the world’s stock markets have had a remarkable run over the last couple months with next to no volatility. A short-term pullback is a near certainty – if things get more serious from there we will have to wait and see. By some measures (S&P 500 price/sales ratio for example) the stock market is at all-time valuations. No one knows if this bull run has another leg in it in 2020 or not, but we expect volatility to be on the rise regardless.
Regards and good investing!
Greyson Geiler
