March 4, 2020

The Power of Clarity

The Markets
The current environment for the capital markets is one of volatility that is affecting the interest rate markets as much as the equity markets. The 10yr US Treasury passed a record, trading below 1%. This is important for many areas of the economy from mortgage lending to credit card rates, but it’s also important for its impact on equity prices. For example, the rise in investment for Real Estate Trusts such as Prologis (PLD) at approximately 2.5% and Consumer Healthcare such as AbbVie (ABBV) at approximately 5.26%, are part of a common move into what are seen as bond substitutes. On the downside is the potential cost of borrowing for a government that has already cultivated an unsustainable amount of debt. In all, the markets can reflect what the economy is showing us, and from what the individual or corporate investors wants or needs and a host of other external events, read on.

The Economy
The Fed lowered interest rates yesterday and there were three uncommon aspects to their move. The first is the move was for .50%, which is twice the more commonly incremental moves and a practice not used since the financial crisis. Also, the vote was completed on a day that was not a scheduled Fed meeting. The decision was also unanimous, which suggests there is common agreement, but not necessarily common purpose. I suggest the latter because it is somewhat rare for a unanimous vote and the markets were confused as well. Coming in today the ISM Service Data was released and went from 55 to 57 (over 50 is expansion, under 50 is contraction). This was on the back of yesterday’s decline in the ISM Manufacturing Data which still managed to remain over 50. Chairperson Powell in his press conference yesterday also commented that the economy was strong in spite of the Fed need to lower rates. In short, the markets, which had a strong up move on Monday retreated from that move on Tuesday after deciding that .50% added uncertainty rather than contributed to the markets hunger for clarity. But coming in today the market resumed the uptrend from yesterday, which may have had as much to do with some correction of the oversold condition, or the coronavirus, as from the relief from a Biden win in the Tuesday ocean of primaries on the back of economic strategies more agreeable to many investors.

External Events
Further investigation into the Fed’s .50% rate cut led to an early morning G7 conference call that, In my opinion, suggests the domestic rate cut was a compromise to help our potential economy’s moderation and the European perpetual economic moderation, all caused by the uncertainty of the coronavirus. After all, Europe currently has a bigger problem with the virus than the US, and no room to further lower their own interest rates as well. This also suggests that if the virus become clearer, half of the Fed’s move could be reversed before summer. Another external impact is the election, namely Biden (relatively Bullish), Sanders (relatively Bearish). As far as the virus is concerned the constant banter overshadows the importance managing a perspective that is blinded by uncertainty, especially regarding global economic impact. One effort that might help could be the push to distribute more kits that the national grid of hospitals can use to identify those with the coronavirus, and those with some of the viral conditions. In this respect the number of identified persons connected to virus would likely rise disproportionality to what we’ve seen thus far. On the other side, the number of fatalities as a percentage of the total cases identified would exponentially shrink. In my opinion, this is very important, because at that point the focus could shift measurably from who has, or who might get the coronavirus, which is uncertain, to the impact suggested by the number of fatalities, which sadly are certain. That would be a much clearer perspective that would further focus the narrative on hope and the markets on economic data, and further illustrate the power of clarity.