Market Strategy 3/09/2020
The End of the World as We Knew It?
Current events suggest that after COVID-19 dissipates things will not return to the way they were before
Key Takeaways
- This week investors will likely begin to consider if recent market reaction has been overdone.
- Last week’s equity market decline pushed the market’s multiple to 16.8x forward earnings, which is below its five-year average of 16.9, and below 18.2, where it began the year.
- The US 10-year Treasury yield, which closed Friday at 0.762%, by Monday in Asia was yielding 0.476%, yet another record low signaling extreme “risk off” behavior.
- Last week’s jobs data, which substantially exceeded expectations, was virtually ignored by the markets.
A near “everything but the kitchen sink” week of good news, “good news taken as bad news” and genuinely bad news saw stocks move from “surge to plunge mode” on a day to day basis last week.
It was a terrific environment for headline writers, breathless reporting and dark projection that was at times countered by moments of relief and prospects that at least some things might actually be stabilizing.
By the end of the week “we’re not out of the woods yet” seemed to us to be the appropriate if not a somewhat understatement of the global state of affairs from a perspective of what progress had made in managing the COVID-19 situation in different parts of the world or in parsing the effects of the virus on stocks, bonds and the workplace.
Negative Extrapolation ran rampant
Suffice it to say that in a world of some 7.94 billion people a relative small number of cases of coronavirus (108,000) as well as more than 3,700 related deaths has led to—if not yet panic—panicky behavior whether in stockpiling and hoarding face masks, surgical gloves, water and food supplies or extreme negative extrapolation and projection of where the global economy and markets are headed bringing on surging US Treasury bond prices, commensurate with historically and dramatically lower yields and raised levels of volatility resulting in falling stock prices.
Good news about policy responses to COVID-19 being ramped higher stateside and elsewhere last week as well as central banks around the world slashing interest rates and governments pledging funds to facilitate response and offset economic fallout offered short relief as markets focused on the uncertainty rather than any progress in rate of response.
As we headed to press stateside this Sunday evening news crossed the proverbial transom that the yield on the US 10-year Treasury note had dropped to an historical low of 0.476% versus 0.762% last Friday; and 1.162% last Monday.
With the yield on the 10-year Treasury at these levels mortgage issuers may have to take a cue from the traditional bakery and ask prospective customers to “take a number and move away from the counter.”
From our perspective on the market radar screen the higher Treasury prices go and the lower yields fall the greater the pain that will be felt by latecomers to that party.
Let’s just for a moment focus on the data…
Economic data released last week in the US tied to job growth, wages and unemployment significantly exceeded economist survey expectations but were paid little attention and disregarded as they were considered to be “in the rearview mirror data points” rather than evidence that the economy is facing the coronavirus packet of uncertainty from a position of strength rather than weakness.
The equity market which had looked for a rate cut by the Fed last week instead of celebrating last week’s 50 bps rate cut sold stocks lower interpreting the central bank’s move as a signal that “things were worse” than had been thought earlier.
We are not physicians or epidemiologists but as experienced market strategists we can’t help but think that the equity and bond markets’ response to the current coronavirus situation (as tragic and serious as it is) looks very much overdone. Medical professionals and government agencies have garnered significant experience over the past 40 years in dealing successfully with pandemic and near-pandemic diseases. Now in the 21st century armed with advances in pharmacology, technology and biotechnology we believe it is not unreasonable in expecting a positive outcome in dealing with the current virus challenge.
It’s not personal, it’s just business…
Look for the global supply chain to become less “China centric” going forward. Twenty-two months of supply chain disruptions during the trade war leading up to the phase one deal and now the supply chain disruption from Coronavirus dictate the diversification of the global supply chain not just away from “China-centricity” and overdependence on it as a world source of supply but away from dependence on any one country in an intricately, inexorably globalized trade matrix.
As Mark Twain is attributed with having said, “history may not repeat itself but it often rhymes”. Taking those words into account we’ll avoid panicking, panic selling, and instead often wash our hands and make shopping lists of “babies thrown out with the bath water” for days in the not too distant future when the opportunity at hand is once again clearer seen to outweigh the perception of risk.
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