Written by Michael Forrester – Founder, President, and CIO of High Note Wealth
It is going to be a very busy day in markets and the coronavirus news cycle. As we know, market moves are directly correlated with the status of the virus at this point. The news flow is fast and furious. Given that, we want to share some of the updates that we have been tracking since market close on Friday. We read a LOT this weekend (so you don’t have to). There is a combination of information coming from the federal government, state/local governments and the private sector that we are monitoring. Some helpful, some not, but we are combing through it all and sharing the key pieces here.
The one piece of information that market participants want more than anything else is coronavirus test results. It sounds simple, but there has been a struggle to get tests available and in the right place to have results in mass. Results are imperative in projecting the economic damage caused by the crisis (everything else is wild speculation). The good news is that the results almost don’t matter. My guess is they are going to be bad, as in, thousands of Americans will test positive. The most recent update we have is that 1.9 million test kits are going out to health providers this week. Results should start coming in later this week, so expect further market volatility (both up and down).
I have additional details below on these topics, but here’s a quick hit on the most important stories:
- The Federal Reserve took significant action on Sunday – reduced rates again and started quantitative easing. Long story short, they are throwing in the kitchen sink.
- Closures are here and more to come. As the CDC continues to parse data, the guidance for gatherings keeps moving down from 500 to 250 to 50. This ends with almost all retail/social establishments closed outside of grocery stores and pharmacies.
- China is mostly back up and running and we have the first data from the crisis period. The data was much worse than anticipated. Asian markets were down a little but not extreme. The market likes bad news better than no news…
- Scientists are at near consensus that the virus can be spread by people without any symptoms. A Reuters research reports shows a single asymptomatic person that left their house twice in a week passed it to 1,160 people (“Patient 31” went to church twice and lunch once).
More on the virus….
Disclaimer: Much of the news cycle on this topic is getting politicized. We have no intention of going down that road as we are merely looking at the data as market participants. The only goal is to process how the news cycle will affect markets today, tomorrow and beyond.
There are two examples that we can look to in terms of the virus fallout. Let’s take China out of the equation given their government has incredible power to control both public and private sectors. Italy and South Korea have dealt with extreme levels of outbreak and the results are very different. South Korea was swift and aggressive in administering tests, practicing social distancing and implementing closures. Italy was a little caught off guard and the virus spread like wildfire. South Korea is currently testing more people per day than the U.S. has in total (that should change this week). This aggressive action has kept the spread in check and their mortality lower than anywhere else dealing with the virus. Not only have these measures saved lives but this will allow their economy to bounce back rapidly. Italy is in a very bad spot. The data is showing high levels of outbreak and a high level of mortality. Some have blamed the Italian government while others have said that the citizens failed to heed the warnings of social distancing. Regardless, the economic fallout is going to last longer and be much more extreme. It sounds like hyperbole but it’s quite possible the damage could cause sovereign default.
Corporate America Actions:
- Retailers are taking their own actions: Nike (and endless others) have closed all stores nationwide; Starbucks has removed all in-store seating; MGM has closed both of their resorts in Vegas and Disney is closing all parks. The list is growing by the minute.
- Eight major banks announced they would stop buying back their stocks. Each had different plans in place, but agreed collectively to stop. The main takeaway is that they are taking the potential need for liquidity very seriously.
Government Response:
- Cities/States shutting down bars and restaurants: NYC, LA, Ohio, Maryland, Massachusetts, Washington, and Illinois. There will be a wave of additions on Monday and Tuesday. The tone on this topic during the Sunday task force press conference leads us to believe there will be Federal action if the mayors and governors don’t.
- Federal Reserve Action: The Fed had a meeting scheduled for this week. Instead of waiting, they acted on Sunday attempting to calm markets and get ahead of what’s to come.
- First, they cut interest rates to 0% which is historic. This move immediately pulled interest rates down further from Friday’s close. The bonds we are holding are going to have a very nice increase this week.
- Second, they reintroduced a $700B quantitative easing package (QE4). For those who remember back to the financial crisis of 2008-09, quantitative easing is a systematic purchase of assets by the Fed from banks to increase liquidity into the markets. This move cements the idea that they believe we are or are going to be in recession. We understand that nobody likes the “r” word, however, they come in all lengths and sizes, so it doesn’t necessarily mean there won’t be good times later in the year. In fact, if the U.S. can get back to normal this just adds to the incredible tailwind that businesses and the economy will have to quickly recover. Stopping the spread is step one which is why market observers and scientists are pushing so hard for social distancing.
- The House of Representatives passed a bill with an aid package that was sent to the Senate. We will see if it gets put into the law but the gist of it is aid directed for emergency leave and free virus testing. We will comment in more detail if it gets passed in the Senate. The bill had bipartisan support so it appears it will pass.
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