FEBRUARY 29, 2020
As a “numbers guy”, I regularly pour over all the economic reports that we receive from various governmental agencies and many of the reports that the public companies issue each quarter in an effort to determine the health and strength of the economy and the momentum behind that strength. If possible, we prefer to tilt our portfolios toward more growth when the indicators are positive and less so when things appear to be softening.
IT IS ALL ABOUT EXPECTATIONS!
Even though the intermediate and long-term fundamentals look remarkably good right now, the numbers just don’t matter, it is all about EXPECTATIONS.
As stated by Federated Market Strategist Phil Orlando:
“Due to rampant fears that the coronavirus pandemic will have a hugely negative impact on both the U.S. economy and our upcoming presidential election, the S&P 500 has plunged nearly 16% over the past seven trading days. That’s the fastest such decline from a record high.(set on February 19).”
Fear, and fear alone, has caused the almost 16% correction that we had been expecting for some time. Recent economic data has been very encouraging with housing and consumer confidence numbers beating expectations. The recent trade agreement with China, expectations that Boeing and General Motors will be going back to work, and the accommodating interest rate moves by the Fed had everyone feeling that 2020 was going to be a repeat of 2019’s rewarding stock market.
COMPUTER TRADING…BAD NEWS/GOOD NEWS?
Computer trading has taken an increasing role in the action on Wall Street in recent years, and it seems to have hit a whole new level this past week.
According to Art Hogan, chief market strategist for B. Riley FBR:
“On a typical trading day, computers account for 50% to 60% of market trades,. When the markets are extremely volatile, they can make up 90% of trades. The problem with that is everyone’s algorithms are pretty much the same, they key on the same trigger points. That causes really fast momentum swings. It’s not that humans didn’t play any role in the stock market’s moves, but once humans gave the stock and bond markets an initial push, the computers took these initial moves and ran with them.”
As we experienced after the 2018 4th quarter swoon, the program trading that sends stocks down so quickly can send them up just as fast. We’ll have to see how this one plays out, but the market’s reaction to the uncertainty caused by the coronavirus has certainly been extraordinary.
We will be watching for signs that the virus is being contained and that life in China is returning to normal.
Quoting from Beata Carinci, Chief Economist at TD Bank Group:
“There will be some permanent loss of activity, but once evidence emerges that the virus is contained or leveling off, subsequent quarters would capture strong economic rebounds as business operations and consumer activity normalizes.
For negative market sentiment to have a worrisome transmission into undermining economic fundamentals, it would have to reflect a fair degree of persistence (i.e. more than a single quarter). History would argue against this outcome.
“It is early days and estimating economic impacts would be purely an exercise in speculation. What we can say is that if this coronavirus does follow a similar path as SARS, the impact on Canada and the U.S. would be limited to 0.1 percentage points or less. This is quite small, although there would be distributive impacts. The negative economic weight would be heftier in the current quarter where activity is most disrupted, followed by rebounds.”
We have had two reports this week from U.S. companies with operations in China that are encouraging.
Kevin Johnson, CEO of Starbucks, said Thursday that the company has 85% of its stores in China open and that the general situation for the company is improving throughout major parts of the nation.
Emerson Electric reported Friday that all its key facilities in China are operational at an average production capacity of 85%, and more than 95% of its supply chain in the county has restarted production.
“BUY WHEN THERE IS BLOOD IN THE STREETS”
I’ll quote again from Phil Orlando at Federated:
“We believe that given strong technical support, the correct approach is to scale into stocks at better prices over time, patiently awaiting for what we believe will be a snapback when pandemic fears eventually recede. If we wait until we get the all-clear sign, the algos will have already bid stocks sharply higher, and we will have missed our opportunity to profit from the market’s current dislocation. No one rings the proverbial bell at the bottom.
While the near-term picture is opaque and uncertain, we continue to believe coronavirus outbreak will fade, the U.S. economy will skirt a recession and we will get economic- and market-friendly election results. Consequently, we would take a longer-term point of view and use the current market hysteria as an attractive buying opportunity.”
We agree! Having said that, please give us a call if you need a clearer explanation of our thinking. We always enjoy hearing from our clients and will do our best to help you understand everything we do.
Dave Crouch Kim Blackburn Kay O’Connell
Registered Principal Branch Operations Manager Financial Advisor
“A correction or crash is not a bad thing for long-term investors.
Of course, nobody enjoys watching the value of their brokerage account go down. I still look back on 2008 as a particularly traumatic period, and in full honesty, there were times when I considered throwing in the towel when it came to the stock market. Thankfully, I didn't. I understood one important concept that all long-term investors should know: that corrections and panics are the best opportunities.”
This material is being provided for informational purposes only. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.