Welcome to Monday after the time change and another first! The first circuit breaker of the market went into effect as I write this. The S&P500 dropped 7% so the market has taken a 15-minute timeout. I wanted to share some quick thoughts, some of which may be redundant.
- We talked before about the expected volatility with the coronavirus. Now the market has been hit by a few more punches. We have Saudi Arabia ramping up oil production since they could not get an OPEC agreement on cuts in oil production (seems counterintuitive, but the 800-pound oil gorilla is going to dish out a little punishment). There is also that things continue to look poorly for Boeing and their 737. When they shutdown production the New York Fed projected a 20% drop in GDP. That is how big of an impact Boeing has. And this was before the virus. The ripple effect will only continue from Boeing. And finally we have people racing to the safety of bonds. People aren’t buying bonds for an incredibly low yield. They are panicking into them for safety of price (long term treasuries are up nearly 30% year to date). Which I get.
- The Fed did an emergency rate cut of .50% (50bps) recently. The market completely shrugged it off. There is now a high probability of a .75% (75bps) cut in the next week or so. Here is a video I recently recorded on what the market has done after rate cuts. It has some interesting data.
- Ultimately, what do I think? Let’s begin with the fact the market, like humans, like certainty. There is just a whole lot of uncertainty right now. No one knows how bad the virus will be. As my wife reminds me, I have no medical expertise at all, so I won’t guess on the medical side. However, the economic impact is what is so hard to predict currently. We all know people who have cancelled plans, had their work travel curtailed, and are just going out less. That doesn’t even consider the slowdown of production overseas and the associated multiplier effect. It will take some time to shake things out and gain clarity. I expect at least a couple more weeks of market volatility.
- Speaking of the market, since the lows we hit in late 2018, the market rallied roughly 35%. We tend to forget that when the market sets a record of reaching correction territory (10% pullback), which it did recently, and it’s totally understandable. At this point, it seems the market is definitely pricing in a significant global slowdown if not a recession. I know the Fed’s recession indicator for a year from now jumped to just over 30% as of the end of February. Who knows what March’s reading will be.
- I don’t get the feeling this is a repeat of the Great Recession in 2008. Then things were much more tightly connected and systemic. The global economy is intertwined, but not as tightly as the securitized loans and derivatives that were so inbred back then.
- Finally, please remember only certain things are within your control. I’ve hammered away over time about creating an index card of your investing philosophy. It may be time to break that out. Number one on my card is a reminder to focus on what I can control – my spending and savings rates, as well as what I pay for investment expenses.
This probably won’t be the final email I have to write about this. I do have one favor to ask. You know my marketing philosophy is rather laid back. However, I think this is important enough to ask you to share this with your friends, if you feel like it. I still remember working at Merrill Lynch in 2008 and watching so many “senior” advisors lock themselves away so they didn’t have to communicate with clients. Or they just sent out stuff written by someone else because they had no personal thoughts. My attitude is the opposite – now is when good advisors separate themselves by increasing communication and sharing personal insight instead of prepackaged material. Good advisors aren’t on Twitter bragging about how clients are not calling them right now. Hey, maybe they are busy stockpiling Purell to sell as a side hustle😉