March 6, 2020

Analysis is Not Interpretation

Bureau of Labor Statement on the Employment Situation
Nonfarm payroll employment rose by 273,000 in February, and
the unemployment rate was little changed at 3.5 percent.
Incorporating revisions for December and January, which
increased payroll employment by 85,000, monthly job gains have
averaged 243,000 over the past 3 months

Good news, in my opinion any job growth over zero is good news and over 200K is very good news. That said, this particular employment report is as of a date just before the general public took containing the newly discovered coronavirus into their own hands. In that time a number of companies beginning with United Airlines (UAL) announced a temporary halt to new hires. No news has emerged of companies laying off employees with the exception of industries, such as manufacturing and energy, that have been cutting back for longer than our current situation has been in the news. This all points to the likelihood that Nonfarm Payrolls may in fact moderate over the next few months, but what about the economy?

The Markets
In spite of a growing state of oversold technical indicators the broad indexes continued to move lower on the back of relentless uncertainty regarding the coronavirus. Although there was a brief respite when it become more likely that a less disruptive candidate may run against the current president, the gains were given up quickly by the end of the day, but not all of the recent gains were erased. This is important to note, because the amount of noise surrounding the challenge of battling the coronavirus, besides being swamped with so much contradiction, is covering up an important fact. Yes, the Dow Index, the S&P500 Index and the Nasdaq Index have all declined nearly 14%, but yes, they were also up 3.6%, 5.04% and 9.65% respectively for 2020. That was before the outbreak of the virus which kept delivering contradiction after contradiction from the thinly veiled announcements released by the Chinese’s government to including tying the hands of the World Health Organization from any onsite investigation. The result, people started to panic, egged on by the media, by the election process and absorbed by the markets overbought to the point of reckless speculation and recent recollection, mostly from those over 40, that the whole mess smelled like the financial crisis of 2008. By the end of this week, nothing has changed, and while this isn’t a financial crisis, how much of a health crisis is still unknown. Buying value, managing risk and maintaining ample cash remains the best strategy for now.

The Economy
The important take away of the Fed decision to lower rates early in the week was that it was done more for insurance than for any clear indication of economic slowdown. While most market participants, including myself, believe moderation in economic activity is inevitable, a resulting recession is less so. This is because of two potential outcomes. The first is the possibility of there being a discovery of a treatment for coronavirus patients, and the second because this slowdown could vey well give the economy a much needed pause before events begin to show more clarity and thereby present the kind of economic lift often seen after blistering hurricanes and other natural disasters that cities and states often find a resurgence in capital and energy to rebuild. As far as interest rates go the drop in mortgage rates is likely to complement the stable rise in new home buying around the country witnessed for the last few months. And the potential for finding within the challenge of overreliance on Chinese exported health products a reason to reconsider moving some of those non domestic production facilities back to stateside. In all, the economy still remains on track, but with uncertainties to remain cautious of.

External Events
Coming into today a question was posed as to the severity of the current market collapse. I mentioned that no such collapse had taken place, at least compared to the corrections of over 20% in 2016 and 2018, and that what did collapse is the civility of a typical market correction. In short, the coronavirus introduced a unique uncertainly and the current electoral process carried its own messy baggage, and instead of watching corporate fundamentals or economic indicators, such as todays unemployment data, endless interpretation is targeted at the very situations that have no analytical foundation, or at least not yet. Hence our newfound community of algorithms have protocols written around interpretation of events with the goal to outperform human analysis, and in the end offer no better result than reckless volatility. And the current environment feels a lot worse than it is compared to a handful of challenging corrections the broad indexes have experienced over the last ten years. That’s not an invitation to not be alert, the opportunities are comingled with said challenges and for now buying, and selling brings welcome value into the accounts and relegate profits and error to the cash bin. Always leaving extra cash, for another day, and another day is fact we can count on without interpretation.