Date: 2024-04-28 Page is: DBtxt003.php txt00018616
Coronavirus Crisis
Impact on Stock Markets
Today's Market | Market Outlook ... The Worst Is Yet To Come
Peter Burgess
'I want every American to be prepared for the hard days that lie ahead. We're going to go through a very tough two weeks''- President Donald Trump, March 31, 2020Investors should prepare for the same It seems trivial to discuss the outlook for capital markets at a time when an increasing number of people around the world are coping with the coronavirus pandemic in their own lives. But just as it was during the hours and days that immediately followed the events of September 11, 2001, we must remain mindful of our long-term financial security. And it appears that the coming weeks in April may also be very tough for investment markets in general and the U.S. stock market in particular. The bounce appears to already be over No sooner did the new quarter get underway on the first trading day in April and the five-day respite that some were declaring a new bull market (it was not, regardless of whether the bounce happened to squeak above the +20% line) quickly ended with a thud. But in reality, the fate of the rally was already largely decided last Thursday, when the bounce peaked at 2637 and suddenly ran out of gas. The S&P 500 Index has been rolling back over ever since. Failed at first resistance Highlighting how weak the stock market remains today, the S&P 500 Index has now definitively stalled upon reaching its first major test. This alone is a stark contrast to the resilient bull that so many investors came to know and love throughout the post-crisis period. For no sooner did the S&P 500 arrive last Thursday at its short-term 20-day moving average resistance (green dotted line below), which also just so happened to be at the lower 38.2% Fibonacci retracement level, that the rally abruptly failed. And after three days of fighting the good fight, stocks on Wednesday appear to have given it up to the downside with the first trading day of 2020 Q2. The market remains understandably gripped by fear It was a promising development back on Friday, March 20, when the VIX finally broke its staggering, Great Financial Crisis-reminiscent uptrend. But instead of descending back lower, the VIX has remained stubbornly elevated ever since. Yes, it’s current reading of 57.06 is discernibly better than its March 18 peak of 85.47, but we should not forget that we’ve had a sustainable reading over 50 has happened only once before in the past three decades. Thus, the fact that we are still lingering at these historically high levels suggests, if anything, that U.S. stocks may be reloading for another sharp move to the downside in the coming days. By historical comparison, this does not look like a “V”-shaped bounce like we saw in after Christmas Eve in 2018Q4 and 2019Q1, when the VIX quickly descended back lower. Instead, what we are seeing today resembles the point in late October 2008 when a strong, nearly +20% bounce over six trading days sent the VIX back briefly below 50 before stocks rolled back over and plunged to new lows by mid-November. Expect stocks to fall to lower lows in the coming weeks The S&P 500 bottomed at 2191 last Monday, March 23. Using the progression of lower lows on the S&P 500 dating back to January 2018, the benchmark index should be expected to fall as far as below 2100 in the near term on any rollback over to the downside. Of course, as shown by the expanding triangle pattern in the chart above (higher highs and lower lows dating back over two years now, which is unusual), it should not be surprising if the S&P 500 Index were to overshoot to the downside in the short term just as it did to the upside from November 2019 to February 2020. As a result, a near-term drop that takes the S&P 500 back below 1900 in the coming weeks also cannot be ruled out. What about not fighting the Fed? It cannot be ignored that the Fed has not only unloaded its entire policy toolbox, but has effectively emptied out an entire hardware store’s worth of responses to this crisis. If it’s a question of “go big or go home”, the Fed has 'gone huge'. They may not technically be “all in”, as it could conceivably expand its balance sheet to infinity and beyond (not sure what the US dollar would look like at that point, but they are unbounded), but they are doing “whatevererest it takes”. Nonetheless, it is important to remember that they are doing so not to attempt to spark a sustained economic recovery like they tried so many times in vain during the post crisis period. Instead, they are engaged in a desperate fight to buy some time for fiscal policy makers to act and for the virus to start to subside so that the economy can be unlocked. It is also worth remembering that the Fed does not always win, at least not right away. For example, it took more than two years after the Fed started slashing interest rates during the bursting of the tech bubble in January 2001 before the stock market reached its last bottom in March 2003. And the stock market hadn’t even reached its final peak yet when the Fed started cutting interest rates in September 2008, yet it took a year and a half before stocks reached their final lows in March 2009. Indeed, the monetary policy genie is out of the bottle. Now that the Fed is buying securities like munis and corporate bonds, anticipate that they will now be expected to always buy securities like munis and corporate bonds forever more (or until the current fiat currency regime comes to an end). But this time, and at least for the time being, the challenges remain bigger for the market than anything the Fed can do. We’re still not truly doing “whatever it takes” The Fed is doing “whatever it takes”. And I would argue that fiscal policy makers in Washington are also doing “whatever it takes”. Unfortunately, one more important “whatever it takes” is still missing that is critically important in finally seeing us through this crisis. What’s missing? We still do not have a coordinated national “stay at home” response to the COVID-19 crisis. Instead, states and municipalities have been left to make these decisions on their own, with vastly differing policies and time frames across the country. As of April 1, thirty-seven states now have a state-wide “stay at home” order. This is up from nine roughly one week ago. Another eight states, including Missouri, Pennsylvania, and Texas, have “stay at home” orders in parts of the state. And five states still have no restrictions in place at this time. This is a problem, as we the people are effectively doing “some of what it takes”, but we’re still not doing “whatever it takes”. Just like the Fed had to go “unlimited QE plus” and Washington had to go “$2 trillion plus with more to come”, we will need to go “stay at home” nationally before it’s all said and done. And when I say “stay at home”, I mean really “stay at home” and not “stay at home except for going to the park to hang out with friends or play pick-up basketball on a nice spring day”. Don’t get me wrong. I’m not saying that the “stay at home” policy response is an easy one. It is economically and psychologically crushing in many ways. And it’s a heck of a lot harder to do in the short term than the Fed hitting CTRL+P on the printing presses and Washington blowing out the deficit. But the longer we have different parts of the country coming to this “stay at home” decision on an ad hoc basis, and the longer we have certain parts of the country trying to continue as if everything is normal, the longer we will risk the ongoing spread of the virus, the longer it will take to finally start “flattening the curve”, and the greater the chance there is that we will face second-wave cases once “stay at home” orders are finally lifted at some point in the future. All of these consequences will prolong the negative impacts on the U.S. stock market in the days, weeks, and months ahead. In short, it is the stuff that prolonged bear markets are made of. Reasons for optimism Before closing, it is worthwhile to touch on the positive, as there are a number of good reasons for optimism on which investors will want to increasingly focus as this episode continues to unfold. First, we will overcome this crisis. The rate of increase in new active cases in this country will eventually start to flatten. The number of new cases will subsequently start to decline. Eventually we will begin to see the light at the end of the tunnel like a number of other countries around the world are starting to today. The hardship that we are experiencing right now is tragic, but it fosters resilience and builds character. And resilience and character are things that have been sorely lacking across financial markets for a long time now. Also, we will soon know a lot more than we do now. the true negative impact on the economy and the financial health of corporations is unimaginable right now. And as we progress through the month of April, the economic reports and corporate earnings announcement are going to undoubtedly be absolutely horrendous. But over the next few tough weeks, what is currently unimaginable will increasingly become more conceivable. In short, we soon will start to have some data to work with to begin to understand the true impact of this crisis. Since we already know the data is going to be really bad, almost nothing should be shocking to investors outside of the periodic “exploring strategic alternatives” corporate announcement. But as we increasingly get this really bad data in hand, investors will have something to model and better understand the path we are actually on. And any lessening of uncertainty and increased visibility, even if it’s bad news, is dramatically better than the still largely unknown we are blindly sailing in right now. This is the stuff of eventual market bottoms. Bottom line Expect lower lows in U.S. stocks in the coming weeks. And prepare for the fact that we are likely at the early stages of this new bear market episode that may continue for the coming months, if not years, before we reach a final bottom. We will overcome this crisis, but it is likely going to take a good deal of time before it’s all said and done. After years of policy stimulus, stocks are now falling from record high valuations and bond yields are at historic lows. Reality is now returning to global capital markets. Do you have a plan to navigate what is left of today’s bull market while also positioning for the next bear market? Come join us on Global Macro Research, where we apply a contrarian investment approach in preparing for risk in the future while positioning for opportunity today. Members receive our: · Monthly Macro Outlook · Monthly Portfolio Review · Chat Sessions · Special Reports Sign up today and prepare for the road ahead. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I own selected individual stocks as part of a broad asset allocation strategy. Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners and Global Macro Research makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners and Global Macro Research will be met. Like this article Follow Eric Parnell, CFA and get email alerts