The week that just passed was unusual. I feel I can say
that as I’ve been an active portfolio manager for almost thirty years and I may
have seen nearly every market condition one could imagine. Not that this week’s
market drop isn’t like other market corrections. Where this drop differs begins
at the cause, namely this isn’t an economic or financial crisis, it’s a health
crisis. And unless one is convinced that the coronavirus is already a crisis,
as suggested by the unusual fact that the market drop occurred almost
exclusively in one week, even that idea feeds the prevailing level of
uncertainty. As of today, there is little known about the prevalence of the
disease in spite of the increasing number of interpretive conclusions emanating
from our current political body. And not exactly with comforting outcome.
The Markets
Another unusual outcome of the drop this week was the
fact that the three primary indexes (Dow, S&P and Nasdaq) finished the week
down from recent highs -14.1%, -12.9% and -12.9% respectively. This suggests
two contributors, the first is there is widespread ETF selling, much from our
algorithmic friends, and the second that technology, while feeling beat up, is
holding its value against declines in more common household names such as
Proctor & Gamble (PG). For now, the markets declines are also being met
with incremental buying, on the back of comments by the Federal Reserve Board
or statements of reassurance from companies such as Microsoft (MSFT) that the
impact of the global aspect of the virus on the balance is inevitable but
manageable. In the meantime, the next few months of economic data will bring a
clearer picture on the economic impact of the virus and hopefully the virus
itself will have a clearer picture as well.
The Economy
The fundamentals of the economy remain strong in the
words of Fed chairperson Powell. Nonetheless he went on to suggest that
lowering rates would be considered if the economy warranted it. In my opinion
that is almost inevitable as the Unemployment data over the next few months
data could very well show a steep, although perhaps temporary, decline in
hiring. Keeping in mind that the temporary halt in hiring is not the same as
firing employees. Likewise, the current vigor of the consumer as measured
through sentiment and service indicators will be important to watch. At that
time a better reason for the Fed to lower rates will present itself. As far as
the virus is concerned, in my opinion, there is little to warrant a Fed ease as
well, since it may have a positive effect on the broad indexes, but not
necessarily a stable one. In short, more facts have to come out and that could
go on for the foreseeable future.
External Events
Narcissism is alive and well, humility is around the
corner. The political machine doesn’t have a virus yet and it’s hardly
surprising, but also sobering. For now, it’s probably best to maintain a
watchful eye over global economic events over political events if the outcome
of the virus and its impact is ever to be gauged somehow. Cash, and the
increasing value of assets in the broad markets will continue to keep our
interests while also serve as a welcome distraction.
