by Daniel Shvartsman
We’ve had periods of sustained uncertainty in the post financial crisis world, whether they be the debt ceiling ‘negotiations’ of 2011, the bottom falling out for oil in 2014, the thrashing of January/February 2016, or the near-miss of Q4 2018. But I can’t remember an event that has caused such acute uncertainty and that produces as wide a range of potential outcomes as the coronavirus and its subsequent contagion as both a virus and as a chaos agent in economies and markets around the world.
To try to help investors size that uncertainty and think through what might happen next, we surveyed our Marketplace contributors. They are dedicated to providing ideas, analysis, and guidance in navigating the markets, after all, and this is as much a market as any in need of some guidance. 54 participated in the roundtable.
We asked nine questions about how our authors diagnose the current situation and what their prescription is for their own portfolios, and we’re breaking the responses into three parts, with three questions at a time. These questions went out Tuesday morning, March 10th with the last answers coming in late Wednesday, and authors are listed in order of the time we received their answers. Our questions are in header font, and we’ll include author’s disclosures at the end of each roundtable.
Richard Lejeune, author of Panick High Yield Report: Markets were at an all-time high, but some high yield sectors were out of favor even before the coronavirus sell off.
Cestrian Capital Research, author of The Fundamentals: We think the sell-off is not done yet. At the c.280 level, SPY remains within the upward trending channel that it has occupied since the 2009 climb out of the financial crisis. We believe the real-economy events are likely to impact the market more than has already been the case, so we believe there is further downside to come. The counterpoint is that in an election year we expect the US administration to use every tool in the toolbelt to keep the economy moving up and the market with it. We said earlier this week to expect fiscal stimulus since the Fed’s capital cannon was proving ineffective; Monday night’s proposed tax cut is the first instance of fiscal stimulus – we expect more in the run-up to the election.
ADS Analytics, author of Systematic Income: It is clear that risk markets did not drop because of either record highs or excessive valuations. Instead, the catalysts were not one but two unexpected events of the coronavirus pandemic and the Saudi oil gambit. This means that the extent of the sell-off will largely be driven by both the global community’s ability to contain the spread of the virus and limit its economic damage as well as a required rebalancing of the oil market. Unless we see significant clarity on both fronts, markets can easily go through fair-value levels.
Andres Cardenal, CFA, author of The Data-Driven Investor: Indeed, there was too much optimism in the market in January and early February, and nasty corrections tend to happen when there is too much complacency. This is why we raised cash to 50% of the portfolio on January 20. You never know when the correction will come or how deep it will be, but you can always tell that a correction is coming when optimism is exacerbated.
Ranjit Thomas, CFA, author of Stock Scanner: That is true. However, we are also at historic lows for interest rates with a 10-year Treasury yielding 0.6%. So in that context, the valuation for equities is not out of whack.
Lance Roberts, author of Real Investment Advice PRO: One of our concerns is that the virus may be the pin that bursts a wide array of asset bubbles in stocks and credit. As such, we are cautious, closely following technical indicators, and maintaining a lower than normal equity exposure. As the global and domestic impact of the virus continues to grow the odds of a global and domestic recession and credit market difficulties increase.
Early Retiree, author of Stability & Opportunity: Not much has happened in my view. The S&P 500 is back to where it was 9 months ago – i.e. 9 years into the bull market when everybody already said valuations where lofty. That said, there has been panic selling and hence there are specific market inefficiencies that we can profit from.
Ruerd Heeg, author of Global Deep Value Stocks: My starting point is that markets are at all-time highs, in terms of valuations. I just published a blog article on previous big market downturns. Based on that analysis I think the current downturn will last at least 2 years. So my view is that this is just the beginning.
Long Player, author of Oil & Gas Value Research: The market was too frothy and this sell-off proves that. It is still too frothy and needs more house cleaning. The actual date is not as important as clearing out the speculation. It is time for the market to begin factoring in risk again and get rid of this idea there are sure things.
Dane Bowler, author of Retirement Income Solutions: A correction was due in some of the overvalued mega-cap stocks, so in that sense, the pullback was healthy. That said, a lot of babies got thrown out with the bathwater which has left some value REITs quite opportunistic.
Elazar Advisors, LLC, author of Nail Tech Earnings: Besides the health issues the Fed announced a repo taper a little before the peak. People didn’t respect that enough at the time of the January Fed meeting. We called it out as something important to subscribers.
Yuval Taylor, author of The Stock Evaluator: The starting point of the sell-off was the height of a value and size inversion that was at least two years long, in which the more expensive and bigger a stock was, the higher its return. We were coming off the crest of a market that had essentially failed to function as a market should. How sustainable is a system in which expensive things become more expensive and cheap things become cheaper, in which big things become bigger and small things become smaller? At some point, either people are going to stop participating in such a system, or the system will reverse course. It took an unexpected catalyst to get this market to fail, though the value and size inversion has worsened during the rout.
Mark Bern, CFA, author of Friedrich Global Research: I actually started moving to cash and bonds early in January because I did not like what I saw coming. My concern was not (and still isn’t) about casualties but rather about the economic damage that would occur due to measures needed to be taken to contain the virus. So I am not surprised by the sell-off so far and expect it to get worse as Q1 earnings and guidance come out next month.
Chris Lau, author of DIY Investing: The new coronavirus in China created multiple unique problems that parts of the government could not solve. The Federal Reserve felt the pressure to save stock market valuations but it was a flop. It tried to shock the market with a 50 basis point cut, only to fail. Now, the oil market war amongst the biggest nations will truly test financial borrowing systems.
Richard Berger, author of Engineered Income Investing: The market was in need of a healthy correction but the current sell-off is ridiculous. Very safe and well-priced tickers have been dragged down along with the broad market. Many in the infrastructure sector are completely immune to the effects of the virus, its supply chain disruptions, and the oil price war. American Tower (AMT) for instance was down 15% with the broad market even though it has over 25,000 cell towers globally with long term 10-year+ contracts, including annual price escalators, that assure its continuing cash flow regardless. Cellular companies, utilities, and others also fit this category.
Mark Hake, CFA, author of Total Yield Value Guide: My view is that the economy is strong, the impact of the virus outbreak will be temporary and the fact markets sold off from a high does not prevent it from rebounding dramatically once the outbreak subsides. And that is highly likely to happen this time.
Dhierin Bechai, author of The Aerospace Forum: The sell-off can be considered a healthy correction, while COVID-19 provides a risk to the economy, it seems that after posting new highs in recent months the market needed a reason to sell off. COVID-19 became that reason especially since the concerns about economic growth have been around for some time now. There was a certain disjoint between economic growth expectations and the market moving higher like there were no concerns.
Damon Verial, author of Exposing Earnings: The down gap we saw on February 24 in the Dow is unlikely to be filled anytime soon. But historically, these kinds of quick corrections tend to face dip-buying resistance, leading to a bounce. The issue now is not the direction but the speed; many believe that the selloff was too fast, and we now are in a regime of high volatility, which is uncomfortable to investors, especially those who began investing during the period of low volatility that characterized the recent rally.
Integrator, author of Sustainable Growth: I view the sell-off as a much-needed valve release to take out a little steam and frothiness from market valuations generally and certain sectors in particular. This aggressive decline on what I see as being a temporary event should actually help reset markets for additional growth to come. I am a buyer on these declines
Donald van Deventer, author of Corporate Bond Investor: Kamakura’s Troubled Company Index had already shown that corporate credit conditions worldwide had fallen to the 23rd percentile of the period 1990-2020 by the end of February. So a further decline to the 8th percent (as of today) is not a big surprise.
Fear & Greed Trader, author of The Savvy Investor: Extremely relevant and playing a HUGE part in the correction.
Fredrik Arnold, author of The Dividend Dog Catcher: Opportunities abound. Keep your powder dry and bag that stock that’s been overpriced forever when its dividend from $1K invested is equal to or greater than its single share price.
D.M. Martins Research, author of Storm-Resistant Growth: I have written about how, based on my detailed research and back tests, investing more aggressively at or near all-time highs counter-intuitively makes the most sense from a risk-adjusted perspective. But the current selloff served as a reminder that markets can always throw a curve ball when you least expect it. The key lessons that I have learned are (1) paying very close attention to price action is crucial, and (2) “buy-hold-forget about it” (or hiring a professional money manager) may be the best approach for individual investors who do not have the bandwidth to monitor the markets on a daily basis.
Anton Wahlman, author of Auto/Mobility Investors: The market had entered into a “FOMO” – fear of missing out – phase in which most market participants realized that the market was overvalued on traditional metrics, but had come to believe that The U.S. Federal Reserve would simply continue to print so much money, that the market would be going up no matter what. That is, at least until we get through the U.S. November 2020 election. The virus issue simply came out of left field and ended that thesis. The timing was as unexpected as an asteroid or Earthquake.
Tarun Chandra, CFA, author of Prudent Healthcare: In my opinion, too much importance should not be given to where the market is – at its high, in a correction, or in a bear market – in determining how it reacts to a systemic shock. We could have had a viral outbreak a year ago, and the market would have still been near its high. The flip side of this question can be, would we have been better off if the market had already fallen steeply prior to the outbreak occurring? Not likely. If we were in a growth mode then we are risking a contraction, if we were in a recession then such an outbreak would have increased the risk of a depression. Market is at a level for a reason based on earning outlook, economic outlook, and monetary policy. Today, the earnings and economic outlook are in jeopardy and the market has begun to reflect that risk.
Cory Cramer, author of The Cyclical Investor’s Club: Valuations going in is probably the most important aspect of this that is often overlooked in the financial media. Most stocks should have already been sold because of high valuations before the coronavirus even started. So, for me, that made the decision to sell and to move to large cash position during the first week of the sell-off fairly easy compared to if the market had started with reasonable valuations.
JD Henning, author of Value & Momentum Breakouts: The sell-off to date has followed my Momentum Gauge™ signals very closely. All 8 of the volatility moves greater than +/-2% in 2020 have occurred since the Feb 24th negative signal. After more than 5 months with no changes in positive momentum conditions we received a series of 3 topping signals in the past month that started on Jan 24th, then Feb 7th, and most recently on Feb 24th. Revisiting The Signals That Forecasted Every Major Downturn Since The 2018 Volatility Shock: What’s Next These signals have reached the most negative levels since 2018 and delivered ample time for members and myself to move to cash and/or follow the Bull/Bear ETF combo trades for strong inverse positioning for substantial gains. I see this selloff continuing until the next signal change with a great deal of uncertainty in external conditions surrounding the virus and oil production disputes. Since Feb 24th I have halted my long portfolios and have been holding and adding to leveraged bear funds from the signal UVXY +179%, FNGD +34%, ERY +180%, SPXU +50.2%, as tracked on my ETF signal page.
ONeil Trader, author of Growth Stock Forum: I have been “hiding” in the biotech/pharma industry for quite some time. Even though biotech stocks had a nice run in the last few quarters, they remain undervalued, especially on a relative basis and I remain calm and very optimistic about the future. The broad market sell-off can be healthy but, you know, everyone says a pullback or a correction would be healthy and then everybody gets scared when it happens (The Fear and Greed Index is at extreme lows as I write this).
Dividend Sensei, author of The Dividend Kings: On February 19th we closed at a forward PE of 19.3, 18% above the 25-year average of 16.3. It was the highest valuation in 18 years. Dividend Kings has been warning our members that a pullback/correction was inevitable and the slightest bit of bad news could send stocks sharply, but temporarily lower. COVID-19 was just that “bad thing” that happened. If it wasn’t the pandemic, it would have been something else eventually.
Tom Lloyd, author of Daily Index Beaters: This is the “perfect storm” bear market. The market was overvalued. The Coronavirus recession will take earnings down. The market PE will come down for the double whammy. If that is not bad enough, companies will have a cash squeeze. The flip side is that the market will probably go up as fast as it went down, but we don’t expect to see that until 2021.
Jonathan Faison, author of ROTY: Many of the valuations I’m seeing in small to mid-cap biotech are still in the reasonable range, and continued M&A activity (think Gilead’s (GILD) recent all-cash buyout of Forty Seven (FTSV) for $4.9 billion to strengthen its oncology portfolio) shows there is still appetite for solid science and promising assets in this space. At the same time, it’s painfully evident that this is a high beta sector and so movement in stock prices can be exaggerated in both directions. Investors need to know why they own what they own and be very honest with themselves regarding the time frame they plan on holding (near term catalyst driven versus patience over the long term).
Bull & Bear Trading, author of Trader’s Idea Flow: Trader’s Idea Flow is a short-term trading service. As an all-season vehicle that excels in trading range markets, this is the type of opportunity that we have been waiting for. We called for 2020 to be a trading range market in the 2019 year-end Marketplace Roundtable and a market correction coming into 2020 as we believed equities were at least fully valued and actually overvalued in many cases. When markets are overbought, then there is always some negative catalyst that will come along to cause a correction in valuations. It just so happens that at this time we have dual black swan events to cause a deep correction bringing us close to bear market territory. We are even happier to state that we have covered our short trading positions into this rapid and steep correction and we are now long this market. This is the buying opportunity that we have been waiting for and we intend to take full advantage of this trading range market in 2020.
Bret Jensen, author of The Biotech Forum: I have been saying the market was overbought for several quarters now both on our Forum services and in my Real Money Pro columns. The S&P 500 rose nearly 30% in 2019 despite basically flat profit growth. In July we started to post ‘option plays of the week’ using covered calls to our members at The Biotech Forum and The Busted IPO Forum to help mitigate downside risk protection buying the market at current levels. We also had built up substantial cash in the model portfolios of The Insiders Forum and The Busted IPO Forum late last year by selling several of our winners that hit our fair value estimates. We are now slowly and incrementally putting this ‘dry powder’ to use incrementally at lower entry points provided by the recent sell-off.
Joseph L. Shaefer, author of The Investor’s Edge: Patience is a virtue, complacency its own worst enemy. This sell-off was overdue.
Laura Starks, author of Econ-Based Energy Investing: Although the cause is both gigantic and dramatic, the fact of the sell-off itself is overdue.
Michael A. Gayed, CFA, author of The Lead-Lag Report: It doesn’t at all. Complacency is hard to measure and is more anecdotal, so I tend to not give much credence to that argument. The conditions were present towards the end of January for a risk-off period as documented in The Lead-Lag Report when signals turned negative and when subscribers were alerted. The sudden realization by market participants about Coronavirus (and now oil) seems to be why.
J Mintzmyer, author of Value Investor’s Edge: Not sure I agree on ‘complacency’ as lots of value investors have been waiting for a sell-off for years, but they’ve just waiting for a heavy excuse to slam the ‘sell’ button. COVID-19, combined with horribly unprepared health systems, and general unease/panic has given us that reason. The Barron’s ‘Big Money Poll’ from late-2019 showed a record level of bearish sentiment, so it didn’t take much for folks to exit, leading to the trampling we’ve seen in certain sectors. That said, it seems to be primarily the already beaten down sectors that are getting slammed the worst. Energy is down because of the oil price war, but energy was already at record-low valuations. Restaurants are naturally getting slammed due to concerns about Q2-20 revenue implosions, but it’s not like most restaurant stocks were bloated. We likely won’t be on the path to recovery until areas of true excess, such as stocks like Tesla (TSLA), are brought back to reasonable levels. Thus far it’s just the poor getting poorer while the bubbles still float around.
Long Hill Road Capital, author of Bargain-Priced Compounders: I don’t consider those things. It’s better to think of it as a market of individual stocks, not one monolithic stock market. That means whatever one thinks of overall market valuations, there are always individual companies that are incredibly undervalued. And today, there seem to be many high quality companies that are undervalued.
Laurentian Research, author of The Natural Resources Hub: This black swan definitely led to a lower demand for various commodities including base metals, natural gas, and crude oil. Iron ore, copper, and zinc prices have been weak due to the lockdown of China. Asian spot LNG price dropped to historical lows as Chinese buyers declared force majeure. Soft demand for crude oil has already triggered an oil price war, sending WTI to $28 per barrel; a geopolitical chain reaction ensued, involving Russia, Saudi Arabia, the U.S., and other oil producers. So the impact is far-reaching and long-lasting for natural resources investors. In spite of the inherent uncertainty concerning coronavirus and its economic damage, we know it too shall pass. The virus can be subdued in a specific domain within a couple of months, as Singapore, Taiwan, and South Korea have shown; even in China, the origin of the pandemic, the virus appears to be dying down, despite it overwhelmed the mis-managed, ill-prepared and under-equipped country in the beginning. If the Northeast Asian experience is of any analogous value, it is not unreasonable to assume in the U.S. the virus will have run its course by mid-April, thus removing a major uncertain factor for the stock market. We should invest with the impact and duration of the coronavirus malaise placed in a proper perspective.
The Macro Teller, author of Macro Trading Factory: To quote from this recent article: “Sure, nobody was (or could be) expecting this, so it’s popular (and making headlines) to use this as an appearance of a “swan,” regardless of the color you attribute to it. We, however, look at the coronavirus (from a financial perspective) as a very good excuse that the market was desperately in need for. You may claim that the market received more than it wished for, and you can also say that this is a very good excuse (no doubt about that), but it doesn’t change the fact that it’s still, in essence, an excuse.”
Robert Honeywill, author of Analysts Corner | H2 Supergrid: COVID-19 is unlikely to be contained and eliminated like SARS (last known case in 2003). It is more likely to become another ongoing “flu” type disease, highly contagious with less serious illness symptoms than the flu for the great majority, but with deadly consequences for the aged and infirm. Attempts by governments to contain COVID-19 will result in extended supply chain disruption. The financial markets will likely exhibit high volatility for a considerable period ahead. But the underlying narrative of yield seeking is unchanged and stock prices will continue their upward trend in the medium to long term.
Slingshot Insights, author of Become the Smart Money: It leaves me more optimistic that markets will rebound as greater understanding about the virus is digested by the public. If the economy was in a more perilous position prior to the outbreak, I think the window to avoid a recession would be much shorter.
From Growth to Value, author of Potential Multi-Baggers: Sell-offs usually start at all-time highs, so that’s nothing special. As for valuations, I have heard this story for at least five or six years now, and I’m afraid I have to disagree. I think that a lot of ‘old-school’ investors don’t see that the economy has changed dramatically. If I say that the economy has changed, I mean that the emphasis will be much more on technology in the future. Tech companies can scale much faster than any other industry because they have nothing physical involved. Mark Zuckerberg founded Facebook (FB) in 2004, just 15 years ago, and it’s one of the biggest companies in the world now. If you have technology like, for example, Workday (WDAY), that can save you money because you need to hire fewer people, that’s a very scalable model. What we also see is that technology can keep compounding at an impressive rate, years in a row. Amazon (AMZN) still grows its revenue at 20% and more, even though it’s already worth a trillion dollars. Now, of course, if you judge those high growers with traditional, decades-old ratios such as P/E, you think those stocks are very overvalued. But because the growth is so much higher and that growth can be sustained for very long periods, a lot of tech stocks are not expensive, although they seem to be at first sight. I think that the sell-off is an opportunity for long-term investors. Some stocks are still expensive but there’s already a lot of value in the market now if you look at the continued high growth of some companies. I think we’re not at ‘peak coronavirus’ yet, and therefore the market may fall further if Wall Street sees that the effects are spreading in the USA. I only know that if you invest for the long term, you’ll do very well, and if the coronavirus brings down the prices, you’ll even do better.
Howard Jay Klein, author of The House Edge: I modeled the sell-off in my sector to the one I felt most closely approximates the virus threat and that was 9/11. The terrorist attack and subsequent collapse of the market valuations and the arc of time before recovery seemed to me a valid analogy. On that basis, I believe we will see the downside peak within the next six weeks and a small, but steady recovery thereafter into the fall. Post virus I see recovery to pre-virus levels.
Value Digger, author of Value Investor’s Stock Club: Frankly speaking, we expected a sell-off in 2020. The Fed has been adding billions to the repo market while also lowering rates just to keep the investors in La-La-Land. This is how the Fed has been trying to kick the can down the road and financially engineer the markets over the last years although recessions are a natural part of the market cycle and have happened historically since there has been a market. Due to this relentless intervention, zombie companies were not allowed to die and the market was not amputated from all these festering tumors. As a result, the market was on steroids and reached a cocaine-induced all-time high in February 2020. Meanwhile, the venture capitalists along with complacent fund managers and momentum traders were overplaying metrics with low or zero value such as annual recurring revenue, retention rates and non-GAAP adj. EBITDA to put lipstick on pigs and sell their stuff while glossing over all the timeless investment criteria that make a business model viable. And Coronavirus showed up out of the blue. Coronavirus was a match that lit the overvaluation tinder. The negative impact on the global economy from Coronavirus is big and we believe it will not be a V-shaped recovery.
Joe Albano, author of Tech Cache: It could have been any global reason to push markets down. It was a matter of time before Wall Street found something to point to which confirmed its fear of economic slowdown or recession. The general consensus was, “we’re playing musical chairs so we’ll keep buying while the music is playing, but we don’t want to be caught without a chair when it stops.” The first to sell was the winner.
Victor Dergunov, author of Albright Investment Group: “Healthy equity valuations” is a relative term, as stock valuations are mostly based on projected profits. For instance, Microsoft (MSFT) was trading at around 30 times next year’s projected EPS when the stock was at its peak at roughly $190. However, if we used 2019’s $4.75 confirmed EPS figure, the stock was trading at 40 times trailing EPS. Is that a healthy equity valuation for a mature company like Microsoft? Whether it is healthy is debatable, but it is certainly not cheap. Also, given the current uncertain economic conditions, it is not likely that many companies will hit their current projected revenue and EPS targets. Earlier in the year, it was widely anticipated that the S&P 500 would grow EPS by around 10% YoY in 2020. Now due to the Coronavirus outbreak, it does not seem plausible at all. Recently, Goldman Sachs (GS) warned of no earnings growth this year for the SPX, and even more recently Goldman’s analyst warned of a possible 5% YoY drop in earnings. Also, we are likely to see multiple contractions going forward coupled with lower than expected corporate profits. So, expect stocks to fall further from here before a true bottom is put in.
Ian Bezek, author of Ian’s Inside Corner: Markets were in a similar place, both in terms of valuation and sentiment, ahead of the February 2018 and December 2018 corrections. If the economy picks back up after the virus passes, stocks will continue to moving to new all-time highs. Corporate earnings have nearly kept up with the S&P’s gains since the beginning of 2017 when Trump was inaugurated. there’s nothing special about valuation now that makes a bear market more likely than has been the case for the past few years.
App Economy Insights, author of App Economy Portfolio: When you invest in public equities, sell-offs are part of the business you are in. As long as you are well diversified and don’t need the funds invested in the next five years, a sell-off can only be a welcome opportunity to add to positions at a better price. That’s the way I look at it. I stage my buys, keep calm and invest on.
David Krejca, author of Global Wealth Ideation: Indeed. Corporate complacency stretched valuations and significantly altered behaviour of market participants due to the coronavirus outbreak all suggest we are just early at the fall from the cliff. I do not want to sound overly pessimistic here but the worst may be not over yet.
Elephant Analytics, author of Distressed Value Investing: The sense of complacency was a fairly bad sign since to contain something like the Coronavirus requires a healthy amount of fear. As I noted to subscribers, the Coronavirus appears to be in a bit of a sweet spot for viruses, where it isn’t deadly enough for everyone to take it seriously initially, but still deadly enough to cause major disruptions if it spreads. Thus, I see the sell-off as bit of a turning point in efforts to contain the virus (as fear reflects people taking it more seriously in general).
Stanford Chemist, author of CEF/ETF Income Laboratory: We have been harping on the rising valuations of closed-end funds for a year now; last month, we declared that CEFs had officially entered slightly overvalued territory (see “The Chemist’s Closed-End Fund Report, February 2020: Entering Slightly Overpriced Territory”). This is why we have been urging our newer members to exercise caution, and to employ a dollar-cost averaging strategy on only the more attractively valued positions in our portfolio.
KCI Research Ltd., author of The Contrarian: Simply put, it was a series of interwound epic bubbles that were waiting to be pricked. Amazingly, the current structure of the market has really not unwound yet, as I recently articulated in this recent public article. The SPY Shows The Current Market Structure Has Not Reversed Yet
Richard Lejeune: I view coronavirus as an economic event that is likely to last for about 6-9 months. There are some high yield issues such as DLNG.PB and GSLD that have sold off severely even though all or almost all of their revenues for the next 6 -9 months are already locked in from long-term leases.
Cestrian Capital Research: We’re just watching how the market responds to the news and then to the real economy. We don’t have a view on the biology or the epidemiology. We think the real economy is worse than in Q4 2018 but SPY is only down to that level. So best guess SPY can go lower. Our approach to the uncertainty is to reduce position size, remain heavily in cash, and be sure to hedge positions in order to buffer against shocks up or down.
ADS Analytics: The ultimate extent of both the human and macro-economic toll is impossible to predict. This is why rather than forecasting the potential spread, we are looking for decisive action from fiscal, monetary and medical bodies. This market is going to need a “whatever it takes” commitment on the part of all parties involved in order to stabilize.
Andres Cardenal: The news regarding how contagions evolve, as well as potential treatments and vaccines, is obviously important. So is monetary and fiscal policy to buffer the economic impact of the coronavirus. But how the market reacts to the news can be even more telling. The stock market is a forward-looking mechanism, and when prices start holding on in spite of negative news this is telling you that the bad news is already incorporated into prices.
Ranjit Thomas: In China, the number of people affected is decreasing, so it looks like this will run its course for three months.
Lance Roberts: This is an extremely difficult situation as no one can be sure of the impact of the virus on the economy and how it may change short term and longer term behaviors. Due to the uncertainty, we are focusing on second and third order effects, such as the Saudi decision to produce more oil and its repercussions for the economy as well as credit, the energy sector, and geopolitics.
Early Retiree: It’s unpredictable and made stocks a bit less expensive for this very reason. I don’t think the right way to react for us as investors would be to try guessing the final outcome. The world has always been unpredictable and viruses have always been part of that.
Ruerd Heeg: I am pretty confident the coronavirus will cause a big broad market downturn. Even if the virus itself is contained. If you still want to be long stocks I would go for the very cheapest stocks. For investors in the broad market, I think it is wise to be at least 80% cash.
Long Player: By looking at history (SARS for example). Many of these flu related bugs did not last long and really “died off” when warm weather appeared. Since Spring is just around the corner, the chances of this one being long term are probably not good.
Dane Bowler: To me, it is important to recognize that I cannot predict the epidemiology and therefore must be prepared for a wide range of outcomes. We are doing this by a combination of diversification and ensuring we have a long investment horizon.
Elazar Advisors: We size this uncertainty like we do everything else, we take it day by day. We’re assessing both fundamentals and technicals. Respecting both is important always and especially now. We’re counting the number of new cases per day which keeps moving up. When that slows down that can be a fundamental low. Then we look for a technical low. We got short after the SPY 331 break two weeks ago. That big fast break was a key signal that the markets were finally starting to pay attention. The market through technicals tells you if/when it wants to take a piece of news seriously. That’s why you have to pay attention to both fundamentals and technicals and not just react and chase.
Yuval Taylor: I’m always 100% uncertain about the market’s future. Being agnostic is healthy. You’re never totally taken by surprise because you have no expectations. Instead, you pursue the safest strategy, which, in my opinion, is a low-beta small-cap quantitative strategy based primarily on financial statements.
Mark Bern: The uncertainty is driving the fear that has captured the markets. Like almost every market crash in history, there are still investors buying the dips, hopefully, they are traders, and that is causing a lot of volatility. Without them, the market could head straight down. I believe that the uncertainty will grow as the number of cases and deaths begin to add up in the U.S. and Europe. But I also believe that this virus will act like others in that it will begin to become dormant once warmer weather hits, so the worst (of at least the first wave) should be behind us by May or June. I could be wrong but, if not, then in the second half of the year we could see a strong recovery. But also, if I am right, we could experience a second wave that is even stronger starting next winter during the normal flu season. That is how pandemics in the past have happened.
Chris Lau: I switched my personal news feeds away from CNBC and Bloomberg to news from China, South Korea, and Germany. Monitoring the containment efforts of COVID-19 matters just as much as the limited number of cases reported in the U.S.
Richard Berger: Engineered Income Investing strategy has little care about short or mid-term market uncertainty. By a focus on value in high quality dividend companies and boosting returns from covered option use, we are able to use market uncertainty to our advantage. Volatility tends to increase option premium yields, making it our friend.
Mark Hake: As Sir John Templeton said, the point of highest uncertainty is the point at which you should buy. He also said you cannot expect a different return from others unless you act differently. The fact is the outbreak will almost for sure be temporary in nature. That much is certain, it seems. That fact should affect your long-term investment reaction to this drop in prices – i.e. you should be buying all during this drop. Average cost investing through the dip is the best course of action.
Dhierin Bechai: The uncertainty is rather big, but looking at China it seems they have already gained control over the virus. Italy is in lock-down and strong action is being taken in South Korea. That leaves Iran, US and parts of Europe as a source of uncertainty. With the proper actions, COVID-19 could disappear as fast as it came and with that the uncertainty.
Damon Verial: SARS-CoV-2 is a trigger for the correction that everyone has been expecting. Futures buying is generally bullish still. You can see from overnight trading that dip-buying is still common. We have nevertheless seen this action before: prior to the 2018 and 2019 corrections. While the direction of the market is not downward for certain, heightened volatility is all but certain. This is good for us traders, as it allows the markets to move roughly during the day and overnight. One thing to remember is to trade in the short direction more often than the long direction, as corrections of the type we’ve seen in the past two weeks rarely make a quick bullish reversal; thus, the upside risk of a short position is not realized often, in terms of probability.
Integrator: History shows that past epidemics such as this, whether they are SARS or MERS or Spanish Flu, were all temporary and that markets eventually rebounded after a period of several months. Thus, I view all of this as just temporary uncertainty, a brief external shock which will be removed after several months. I don’t view this as some broader economic contagion that will permanently impair economic growth.
Donald van Deventer: The impact of the coronavirus has to be analyzed company-by-company, devoid of any emotion. Obviously, businesses that thrive based on gatherings of large numbers of people (air travel, hotels, cruise lines, sports events, etc.) will be hit the hardest.
Fear & Greed Trader: Any fundamental analysis is strictly a “guess”. We must navigate using technicals.
Fredrik Arnold: It’s flu season everywhere. Thirty to ninety days will put it in the rear-view mirror.
D.M. Martins Research: I am embracing the uncertainty by risk-balancing my investments across many asset classes, something that I have been doing for years. In fact, now has been the time for my diversified strategy to shine, as it tends to do much better than equities and virtually all growth strategies during periods of distress. For example, my SRG Base portfolio has been up nearly 9% YTD (and still up about 11% per year inception-to-date) on very low volatility and minimal drawdowns. I have been advocating more passionately for multi-asset class diversification in the past couple of weeks.
Anton Wahlman: It seems to me that we could have a one or two quarter 10%+ decline in GDP, which would be huge. However, you would also have to consider a sharp rebound that would re-capture at least part of those losses. The timing of that rebound is just too early to estimate with any confidence right now.
Tarun Chandra: Yes, you’re right about inherent uncertainty. After the Great Recession, the pandemic virus most likely is the first such broad-based economic glue that can gum up the wheels of the global economy. Last month, we had discussed this further in the article “Healthcare Faces A Contagion.” There are too many risk variables and the path they will take is highly uncertain as well. However, we do know that Covid-19, once it takes root, surges and then peaks, if the Chinese data is correct. Thus, there is a light at the end of the tunnel in the relatively short-term of ~60-days. In the US, that intense surge in caseload is still to be witnessed. Sizing up such a shifting mosaic of risk factors is hard and requires frequent adjustments. In times of such heightened uncertainty, being defensive can be the best strategy. Reducing market exposure and preserving capital is of paramount importance. Shifting some allocation to more defensive industries, like healthcare and consumer staples, can be considered as well. Of course, if one has stocks that are part of the long-term portfolio, and one feels able to endure the drawdown that may occur in the near-term, then one should persist with those holdings. Trying to interpret the market in this environment will make you feel smart one day and a fool the next.
Cory Cramer: While there is always uncertainty, I think we have to be realistic and at least demand shallow-recession-like valuations before we start buying. I have more conviction the government will aim to help individuals more than it aims to directly help businesses. There might be a little relief for airlines or something, but from an equity investor’s standpoint, there is a lot of downside in the stock prices still coming before direct government help for large businesses arrives.
JD Henning: The external factors of an oil production war, the coronavirus, liquidity shocks in the repo markets, and increasing risk of more fallout from credit markets continue in the most adverse direction. Combined with the record high negative scores from my doctoral research algorithms, now called the Momentum Gauges™, there is still no indication of downside pressure abating yet. Many validating indicators like treasury yields, oil and gold prices, volatility indexes, and Fed fund rates are almost daily setting new multi-year and all-time records in this correction. At the same time, I am watching the markets return to only 6-month lows from highly overbought levels in what appears to me to be a divergent and muted market reaction compared to so many other reliable measures.
ONeil Trader: The Growth Stock Forum is predominantly focused on biotech stocks and we have been aware of the situation from the beginning. It is impossible to predict how far the virus will spread or when it will be contained globally, but there are good examples of how successful countries can be in containing it – China, Singapore, South Korea are among the countries that have done well and I think Italy is doing the right thing to address the outbreak as well. It is obvious that the outbreak will have negative economic consequences, but from where we stand today, it does not appear that there will be irreparable long-term damage.
Dividend Sensei: Rather than give into fearful speculation I collect the best available data from reputable sources, (like Johns Hopkins, Goldman Sachs, Bloomberg, etc.) and make probability and risk-managed decisions based on the long-term benefits of our members. The short-term is just something you have to get through to achieve your long-term goals. Facts are the cure for fear and the costly mistakes that come with it.
Tom Lloyd: We don’t think it is uncertain. China and Italy provide enough data to show how this is going to play out. The market knows and that is why it went from bull to bear so quickly.
Jonathan Faison: I have zero edge when it comes to sizing up macro events, choosing to instead focus on individual stocks where there appears to be a significant value disconnect (and key catalysts to narrow or close that gap). That said, over the past few months, we’ve been discussing the need for raising enough cash to sleep well at night and being sufficiently diversified (both in same sector as well as across other asset classes).
Bull & Bear Trading: Bottom line is that Covid-19 is just another new strain of the flu that will be with us for good and will likely diminish in severity as the global population builds anti-bodies and a vaccine is developed. Concurrently, let’s also combine what information that we are receiving in real-time from the world’s experience with this coronavirus over the past 60 days or more. China and South Korea seem to be running a parallel course of new coronavirus cases spiking, leveling off, and then being followed by a sharp spike in recoveries about 2 weeks later. Medical professionals tell us that 85% of us will acquire Covid-19 and be asymptomatic or have mild symptoms comparable to the common cold. Tragically, the most vulnerable among us with an average age of about 80 with pre-existing health conditions are making up the majority of fatality victims. Should we prepare for Covid-19 and protect our older family members from this new strain of the flu? Of course, we should. Should we panic, act irresponsibly, feed into the media hysteria, and shut down the economy? No, absolutely not. The current market selloff is a great buying opportunity. Perhaps the real question is, how long will we allow an incompetent, irresponsible, agenda-driven media to damage our economy, divide our nation, and propagandize even vital national interests such as a health concern called coronavirus. The coronavirus hysteria will pass but the public’s memory of the media’s irresponsible hyperbole could endanger future efforts to communicate with the public if we face an actual health crisis.
Bret Jensen: I am more worried about the economic impacts the virus is causing than the actual toll Covid-19 will ultimately inflict on the population. Almost all the victims to date are over the age of 70 years and mostly in poor health, which is the case with almost every new virus including the strains that killed some 80,000 Americans in a bad flu season in 2018. The Surgeon General came out this week and stated that for young adults and children, the common flu is more lethal than Covid-19. My prediction is Covid-19 ends up having a ‘mortality rate’ at or slightly less than the Swine Flu of 2009/2010 that killed some 12,500 Americans and barely drew a mention in the press. That said, government actions (quarantines, lock downs, restricted travel, etc…) as well actions taken by corporations and individual in cancelling travel plans, working at home, etc… are likely to lead to negative GDP growth for at least the second quarter. I do think we will see positive economic growth as early as the third quarter provided the credit markets don’t seize up. Therefore, I am putting money to work on dips on an incremental basis until this ‘mass hysteria’ passes.
Joseph L. Shaefer: Planning for worst case when reviewing the quality of my investment choices – nothing but the best with top-quality balance sheets as well as a select few asset-heavy firms with weak balance sheets that are now bargain-priced and ripe takeover targets.
Laura Starks: Ha! And let’s add an oil price war to the uncertainties of the coronavirus pandemic. We know that the daily GDP effect of the demand and production drops from virus is massive, truly global, and will continue to roll through economies in ways we don’t yet see. So what’s most important to understand is the fourth dimension – time. How fast does the virus spread, does it abate in the summer, at what point are people able to resume normal activities?
Michael A. Gayed: I believe the hysteria around Coronavirus is more dangerous than the virus itself. The economic impact I think is currently being underestimated. There is a loss of productivity that occurs when people work remotely from home. We don’t know how long this will last, and that likely means volatility (both up and down) will likely persist. The one thing we can almost certainly have confidence in is central bank and fiscal actions to try to mitigate further damage.
J Mintzmyer: It’s clear we’ll have massive disruptions to revenues across a majority of market sectors in part of Q1 and certainly most of Q2-2020. Afterwards, it’s uncertain. I am avoiding firms with poor solvency and liquidity, especially if there are near-term debt maturities. Outside of that, I look at the collapse in market capitalization compared to the years of profits which have been erased (i.e. if a stock with a steady P/E of 20 was cut in half, that’s 10 years’ worth of normalized profits vaporized) and think about whether that makes sense. Clearly a crude approach, but it does allow for quick evaluations of the panic levels. In certain areas, particularly high-caliber energy midstream infrastructure, the sell-off simply defies all common sense. In other areas such as levered retail and office REITs, it seems like the selloff could get much worse.
Long Hill Road Capital: COVID-19 is a very serious problem, but it is manageable and solvable if we take it extremely seriously. The first countries to get hit like China and South Korea appear to be improving. New cases per day have been falling there. As countries begin to take the issue seriously, the problem seems to improve. I don’t know when this will fade into the rear-view mirror. That depends whether we take drastic measures to limit the spread now or if we wait until the problem is out of control to do so. Eventually, this will pass but I don’t know when. I do know this isn’t the end of humanity. If you’re truly a long-term investor, you have to believe this is a temporary problem, not a permanent one.
Laurentian Research: This black swan definitely led to a lower demand for various commodities including base metals, natural gas, and crude oil. Iron ore, copper, and zinc prices have been weak due to the lockdown of China. Asian spot LNG price dropped to historical lows as Chinese buyers declared force majeure. Soft demand for crude oil has already triggered an oil price war, sending WTI to $28 per barrel; a geopolitical chain reaction ensued, involving Russia, Saudi Arabia, the U.S., and other oil producers. So the impact is far-reaching and long-lasting for natural resources investors. In spite of the inherent uncertainty concerning coronavirus and its economic damage, we know it too shall pass. The virus can be subdued in a specific domain within a couple of months, as Singapore, Taiwan, and South Korea have shown; even in China, the origin of the pandemic, the virus appears to be dying down, despite it overwhelmed the mismanaged, ill-prepared and under-equipped country in the beginning. If the Northeast Asian experience is of any analogous value, it is not unreasonable to assume in the U.S. the virus will have run its course by mid-April, thus removing a major uncertain factor for the stock market. We should invest with the impact and duration of the coronavirus malaise placed in a proper perspective.
The Macro Teller: The real damage to the economy, consequently markets, is way greater than the health implications. Anything that kills people should be treated very seriously, but when we look at it from a pure financial perspective, there’s no correlation between the (heath) panic to the (economic) damage. Therefore, what investors should be worried of is NOT the (health) “uncertainty” rather the CERTAIN negative impact on the economy. You know where a good excuse starts, but you don’t know where the reality (caused by this excuse) ends. As such, we believe this is not a time to be brave!
Robert Honeywill: COVID-19 is unlikely to be contained and eliminated like SARS (last known case in 2003). It is more likely to become another ongoing “flu” type disease, highly contagious with less serious illness symptoms than the flu for the great majority, but with deadly consequences for the aged and infirm. Attempts by governments to contain COVID-19 will result in extended supply chain disruption. The financial markets will likely exhibit high volatility for a considerable period ahead. But the underlying narrative of yield seeking is unchanged and stock prices will continue their upward trend in the medium to long term.
From Growth to Value: I think we’re not at ‘peak coronavirus’ yet, and therefore the market may fall further if Wall Street sees that the effects are spreading in the USA. But that’s just guessing, of course. I’m a long-term investor and not a coronavirus specialist, so I don’t think I’ve got much to say about either one of the sides here. I only know that if you invest for the long term, you’ll do very well, and if the coronavirus brings down the prices, you’ll even do better.
Howard Jay Klein: I believe the uncertainty will bring an overall 15% downside to the market before we see sustained capitulation and then slow upside recovery.
Value Digger: Unlike Larry Kudlow, we advised investors not to buy the dip last January. We have been saying since early January that due to Coronavirus, another big leg down for the major indexes is a sure thing, volatility will be very high and things will get worse before they get better. We continue to advise investors to stay on the sidelines due to many reasons including forced selling and margin calls. Moreover, we advise investors to hedge their portfolio if they want to beat the market in 2020.
Joe Albano: Plan for the worse, but think opportunity. I just saw a tongue-in-cheek meme about Y2K was supposed to “kill us,” Anthrax, SARS, Swine Flu, Ebola, Zika Virus, etc., etc. were all supposed to “kill us.” On this side of the retirement hill (millennial), these situations can turn very lucrative when you buy in times of great fear and hold for the long-term. Uncertainty is my friend for a while longer.
Victor Dergunov: The uncertainty concerning the effects of the Coronavirus on the global economy and stock markets across the globe is extremely difficult to assess right now. How long will the virus continue to spread for? Will the spreading of the virus calm down and eventually disappear with warmer weather, or will the virus continue to spread aggressively into the spring and possibly the summer months? How prepared are major economies to deal with the virus? Who can quantify what the economic effects will be? Will we see similar situations transpire in other European nations? Perhaps in France, Great Britain, in Germany? What about in the U.S.? How will this outbreak impact consumer sentiment, spending, and corporate profits? So, how will this outbreak affect the consumer in the U.S.? What about corporate profits? What will the final toll be for U.S. and other major global corporations? In my view, there are enough unknowns for market participants to be seriously concerned and extremely cautious right now. Lowering risk exposure and/or implementing protection measures is a must in the current economic environment.
Ian Bezek: As someone with a libertarian streak, I’m inherently skeptical of coordinated government action to resolve crises. That said, they have so many tools in their arsenal that it’s dangerous to bet against them figuring something out for too long. The 2008 crisis could easily have turned into another 1930s-style 90% market wipeout/depression. Instead, thanks to robust, if flawed, government action, the S&P only fell 50% despite the banking sector and housing market getting annihilated. Maybe a flu knocks us down 25% or 30% but people predicting this will get as bad as 2008 are making a bet with long odds.
App Economy Insights: Sizing the uncertainty would not help make better investment decisions. Is the mortality rate of the novel coronavirus 2%? Could it be the same as the seasonal flu? None of these questions would educate a long-term investment thesis. I’m not investing for the next quarter. I’m focused on the next few decades.
David Krejca: Rebalancing, rebalancing, and hedging. Putting a greater weigh to safe-haven assets such as gold and precious metals might show up as a wise move several months from now and ideally having some extra cash ready for buying high-quality names after the turmoil is over might be even wiser.
Elephant Analytics: It is hard to say what will happen with the Coronavirus, but now that we are starting to see major disruptions (large gatherings being cancelled, schools closing, etc…), I am becoming more comfortable with it being contained, although still more work needs to be done. The more short-term pain there is, the better the chance of a positive long-term outlook.
Stanford Chemist: Closed-end funds are an excellent barometer for sentiment since the trading for the majority of these is dominated by retail investors. Discounts are widening as investors sell out of funds at any cost, fearing worse that could befall. We don’t have a strong prediction on how this will play out, given the multiple moving parts involved, but the fact that our portfolios yield ~8% is also helpful, as the relative certainty of receiving a steady income stream from their funds helps to offset market uncertainty and maintain investor discipline.
KCI Research Ltd.: To be honest, it is very difficult, as volatility has exploded, and this has impacted many security prices. Ultimately, I think value is poised to outperform growth, after lagging for a decade, so the best relative and absolute opportunities are in identifying bottoms-up value stocks with potential catalysts that can be accelerated by the impact of COVID-19.
Richard Lejeune: The U.S. Presidential election has important implications for many of the high yield issues I cover. For example, midstream high yield preferred stock issues like CEQP.PR could be impacted if a political party that seeks to restrict the usage of fossil fuels is elected. On the other hand, high yield preferred stocks such as FCELB might benefit from more “green” subsidies.
Cestrian Capital Research: The election is critical as we think it will drive fiscal stimulus. The Fed has little ammunition left to fire.
ADS Analytics: The Fed is not going to be able to manage through this one by themselves though their action will be needed in order to pump further liquidity into the market through repo operations as well as manage what can quickly turn into a demand shock. However, we are also looking for a fiscal response from the government, in order to help those individuals who are either uninsured or are unable to take the required time off.
Andres Cardenal: Liquidity is a major driver for asset prices if you have to select only one major variable to watch in the market environment, that is liquidity. The coming election obviously means that the administration will do anything it can to provide fiscal stimuli in this challenging context for the economy. But the key variable here is liquidity, with interest rates at historically low levels, this makes stocks comparatively much more attractive, especially when it comes to high quality stocks with attractive potential for growth in the long term.
Ranjit Thomas: The US election is far more important from a fundamental perspective as the candidates have radically different plans to meddle with the economy.
Lance Roberts: Money matters!! The Fed has been long trusted to bail out investors in times of need. They may likely succeed again by lowering rates to zero and introducing another round of QE. Assessing investor confidence is the key to markets in the short term. The sell off on the heels of the Fed’s emergency rate cut was not confidence inspiring. On the political front, we are closely following Bernie Sanders. His nomination could be problematic for stocks and in particular certain sectors such as healthcare and energy.
Early Retiree: I think the markets think too much about these matters.
Ruerd Heeg: Obviously printing more money won’t cure anybody. Because the virus results in shrinking supply of goods printing more money could cause high inflation. So printing more money is even dangerous. I do not think the outcome of the US Presidential election is very important for the economy. Currently with Biden as the leading Democratic candidate the election does not seem to be very important for market sentiment either. If Sanders gets nominated it will be different of course.
Long Player: You have a lack of leadership seldom seen in Washington during the current crisis and actions that make little practical sense. The Fed’s action is more symbolic than anything else as there really is not much to be done short term until the full effects become apparent. What was really needed was steady and calm leadership. But that is about as far away from the current leadership as you get.
Dane Bowler: Politics are top of mind at the moment, so the market is trading more on polling results, but in the long run the Fed will matter more. I believe the Fed cutting to 0 or near zero will have significant negative implications for growth and will not have the intended stimulative effects. The U.S. has been economically outperforming Europe and Japan so it feels like a mistake to follow them down the rabbit hole.
Elazar Advisors: If Trump wins or Biden wins, I guess it’s better for markets if Trump wins. But much, much bigger is the Fed is trapped into supplying liquidity to hedge funds through brokers through its repo facility. Those hedge funds are overlevered and require a lot of capital. That’s why they sapped capital there in September when short term rates jumped. The Fed knows this but feels forced to keep supporting these overleveraged hedge funds knowing then when they stop the market crashes. That’s just what happened. The Fed announced a repo taper and within a week or two you had a major market peak just now. Same in late 2018. Fed wanted to back out of easing and market crashed. The Fed is so trapped to provide money the economy isn’t using just so the markets don’t crash. Capital is drying up and the Fed has almost zero ammo with rates at 1% going to .5% probably by the next meeting.
Mark Bern: I don’t like politics and I don’t think it will be much of a factor this year with all else that is going on (not just the virus but the falling price of oil). As far as the Fed goes, there is nothing the Fed can do to fight the outbreak, so whatever actions it takes will have only limited and temporary immediate effects. The positives from Fed actions should take effect later in the year, once the virus goes dormant.
Chris Lau: The Fed played epidemiologist and doctor and is neither. Countering the impact the virus containment has on the economy requires fiscal policy. It also requires the U.S. increasing funding to health agencies and the CDC.
Richard Berger: Politics have very little place in wise investing. Markets did great under Bush, under Clinton, under Bush 2, Obama, and Trump also. Sanders might be somewhat of an exception since his entire platform calls for fundamental revolutionary changes to the nation’s economic system. However, even that would have to make it through a Congress not likely to be radical. No party is going to want to be blamed for failing to act to help support jobs, the economy, and thus the market. This is especially true in an election year. So, expect to see both sides scrambling to spend money and add stimulus.
Mark Hake: As long as a socialist is not elected, politics does not really matter. The Fed actions matter. They need to be providing much more liquidity and have been very absent in this crisis.
Dhierin Bechai: President Trump has continuously been able to point at new market highs and even an impressive February jobs report. He wanted that to continue pushing the Fed to cut rates because even before COVID-19 there were concerns about slowing growth. There is no one thing that is better, but the Fed actions at this point seem to be more needed than they were months ago to produce new stock market highs.
Damon Verial: This rate cut is connected to the presidential election, as one thing stands out: This is the only emergency rate cut occurring near the top of a long-term rally (most occurred within bear markets that had already started), telling me that the president is likely pressuring the Fed to keep the market up, which would help with his re-election. One thing to remember: Generally, the Fed doesn’t cut rates just once in such circumstances; be on the lookout for another cut. Rate cuts are seen as bolstering catalysts for the markets. But an emergency rate cut is a bad omen, as such a thing has historically occurred in bear markets. An emergency rate cut is defined to be a rate cut between FOMC meetings, and only eight have occurred, all during times of panic (e.g., 9/11) or recessions (e.g., 2001 and 2008). The rallies after such rate cuts are usually brief. Usually, the rally quickly reverses, and the market enters a downtrend in the coming months.
Integrator: The Fed’s rate cut was a reminder of its willingness to step in and stabilize. I think that was important as a backstop. It increasingly looks as though we’ll have two “market neutral” candidates for the election which take out many of the wildly damaging economic scenarios. In this context, Fed actions in the event of further declines will be more meaningful.
Donald van Deventer: 20 years of low and negative rates in Japan and the more recent negative rates in Europe have devastated the retail deposit franchise of the major commercial banks, substantially increasing their credit risk. Neither the ECB nor the Fed seems to worry about killing the patient with their negative rate therapy.
Fear & Greed Trader: History says an accommodative FED is a tailwind, the election will be a headwind now given the uncertainty over the “perception” of the virus effect on the economy
Fredrik Arnold: The Fed messing with the money supply is more immediate and the election is six months away.
D.M. Martins Research: The COVID-19 spread and the Fed’s monetary policy reactions certainly matter most at this time – and likely for the foreseeable future. The US Presidential race has been unfolding favorably for the markets, with a face-off between a Republican and a moderate Democrat in the general election most likely to happen. This and the lack of material news on trade negotiations are the positive developments for stocks, but they have been fully eclipsed by the current health crisis and the implications of a zero or negative interest rate environment.
Tarun Chandra: Both are germane issues to the market’s valuations. However, the Presidential elections are more of a fourth quarter dynamic. The Fed actions are more relevant and profound for the moment we find ourselves in. The swift rate cut was an important first step. The next step for the Fed should be the opening of a 0% interest rate business loan window for distressed businesses, while at the federal government level there should be an immediate aid package announced for the Travel and Hospitality industry first besides other measures to eventually roll-out.
Cory Cramer: The Fed will do what the Fed does but there is a certain point where stocks’ relative valuations to bonds doesn’t matter anymore because the implied returns on stocks, due to high valuations, are so low that it simply isn’t worth the risk of owning stocks at such high prices regardless of how low bond yields go. As for the election, the biggest risk to the markets right now is that Trump is defeated. And it has nothing to do with real policy. It has to do with what Trump supporters will do with their money. If one goes back and looks at a chart since Trump was elected, they will find a flood of money that came into the market, presumably from enthusiastic Trump supporters. I think a lot of that money will flow out if Trump is defeated. It doesn’t really matter whether it’s Sanders or Biden who does it. And I still think the election is toss-up.
JD Henning: First, with regard to US Presidential election years there are strong historical seasonal anomalies back to 1932 that April (-0.75%) and May (-1.6%) have been by far the two worst months for the S&P 500 in an election year. In contrast, July (+1.9%) and Aug (+2.7%) have been the best according to market records. Second, we have seen the largest Fed emergency rate cut since 2008 spark a very temporary reversal in the negative Momentum Gauge™ signal that lasted less than 4 days before the signal returned back highly negative. A similar short-lived disruption occurred shortly after the Jan 24th negative signal with the People’s Bank of China injecting the largest stimulus since 2008 in the week of Feb 2nd. Both of these record level central bank interventions were quickly absorbed by adverse market conditions and nothing since has made a positive impact on the current negative signal. These severe conditions combined with historical April/May election year downturns could become worse if external virus impacts and oil production disputes are not resolved quickly.
ONeil Trader: I think the U.S. Presidential election matters more but only if Bernie Sanders ends up as the Democratic candidate because the Street sees him as a threat. But if the coronavirus makes more damage than anyone expects, I think neither matter much, except, once again, if Sanders is the candidate, which I think would make things worse in terms of market’s risk perception in the near/medium-term.
Dividend Sensei: Buffett said, “if you mix politics and investing you’re making a big mistake.” History bears him out. While elections do matter, quality companies adapt and overcome all the challenges within their respective risk profiles. As for interest rates, they only matter to long-term investors to the extent they affect fundamentals, meaning sales, earnings, and cash flow growth. No stock is a bond alternative, as shellshocked utility and REIT investors learned during the worst week for stocks since 2008. Utilities fell 11% and REITs 12%. The broader market fell 11%. When panic runs rampant on Wall Street, no sector is safe. On February 28th, just 7 stocks in the S&P 500 were up since the correction began on February 19th (98.6% of stocks fell). 40% of the S&P 500 was in a 20+% bear market at the time. Bonds/cash equivalents were stable or went up, just as they do 92% of the time stocks fall.
Tom Lloyd: One more drop in interest rates and the Fed is done. They can pressure banks to cover the corporate short squeeze, relaxing lending hurdles. It looks as if Trump is evolving to Hoover and the market expects a drop if the Democrats win. The administration is getting both barrels: a Bear market and a recession.
Jonathan Faison: If it ends up being between Trump and Biden, general consensus in our Chat has been that election of either is a relatively good outcome for the biotech sector (or at least gives us some visibility). Bernie has some great ideas that need to be incorporated in some form or fashion (i.e. better safety net for the poor, fixing a broken healthcare system, etc.), but speaking purely from investment perspective he’d be a disaster for the biotech sector. If and when the economy recovers from fallout caused by the coronavirus, lower rates, and more liquidity should be a boon for the market (again, the issue being that the Fed has less ammo in the future when it does need it).
Bull & Bear Trading: Moderates and Independents have been comprising as much as 40%-60% of recent Trump rallies. The recent Trump rally in southern New Jersey drew a shocking 26% of attendees who self-identified as registered Democrats. Trump’s approval rating among minorities has quadrupled since 2016. Turnout for political events on both the Dem and GOP side has been more robust for the GOP. America is still a center-right electorate, which means 4 more years for Trump. Biden over Bernie seems to be the mission of the Dem establishment in order to attempt to save control of the House. Trump over Biden seems to be a foregone conclusion. This is a positive for markets. Regarding the recent Fed actions: while the Fed has been taking proactive measures, further rate cuts may be akin to pushing on a string. The Trump administration’s proposals for payroll tax cuts and other financial stimulus are more important than the Fed for now, IMHO.
Bret Jensen: Short term, probably Fed actions, although I think the central bank should focus more on provided liquidity to the markets via credit swaps as well as to the repo markets more than cutting interest rates. On a longer term basis, the presidential election should matter more to investors as the likely ‘moderate’ Democratic candidate has already proposed tax and spending plans multiple times over what was offered up by their candidate in 2016 as the party has moved significantly to the left over the intervening four years. If elected, he would likely usher in a considerable amount of expansion in government programs, new taxes as well as a more stringent regulatory environment. None of which will be welcomed by the markets.
Joseph L. Shaefer: The Presidential election adds uncertainty, which markets hate. The Fed’s rate cut made investors think they (the Fed) is panicking, adds uncertainty, which markets hate. Pick your poison.
Laura Starks: It is helpful that the Fed provided liquidity and a rate cut to the market, but I think the swing in the Democratic primaries toward the more capitalist-friendly Joe Biden has been crucial. Pundits can talk all they want about Sanders losing to Donald Trump, but the same pundits said Trump was a long shot in 2016. If Sanders is the Democratic nominee, Sanders could win the presidency. Sanders has such a fundamentally different view of the country and the economy than does Trump or Biden. In the general election, if Biden is the Democratic nominee, Trump would still be better for the economy and the markets.
Michael A. Gayed: I think investors are now coming to the realization that fiscal stimulus may matter more here than the Fed given already historic low rates. If, for example, Trump worked with the Treasury to issue 100-year bonds, and used that to fund a massive infrastructure spending bill, that would have far more economic impact than anything the Fed does. It likely would also result in his re-election.
J Mintzmyer: I believe the Fed is more essential for the overall broad market whereas the Presidential election is more important for specific sectors. Even then, the Fed’s power is limited by sentiment… If the market sentiment is horrendous, the Fed actions will do little to stem the near-term tide. Furthermore, if the Fed moves too early and too rapidly they are sacrificing essential policy tools we might need further down the line. Regarding Presidential elections, I believe the energy sector is the one area most dependent/exposed to these catalysts. Ironically all of the political ‘tail-wind’ from Senator Sanders getting essentially knocked out of serious contention over the past 10 days has been lost on the panicking markets. I believe President Trump’s reelection depends primarily on the stock market performance, so I expect we’ll see lots of market support attempts.
Long Hill Road Capital: I think the market would be fine with either Biden or Trump. While Biden would probably roll back corporate tax rates to pre-Trump levels, I do think it would be gradual over a number of years. He would also be more predictable and perhaps candid than Trump has been, and markets tend to like certainty better. I think the Fed’s recent rate cut was probably unnecessary because lower rates aren’t going to get people to travel and behave normally if they are quarantined or otherwise avoiding crowds. I think the Fed should have saved that arrow. But I could be wrong.
Laurentian Research: The Fed’s interest rate cut is like a rising tide lifting all asset boats, while the U.S. presidential election magnifies market volatility like strong wind making water choppy. The Trump administration just said that it would not sit on hands watching KSA and Russia to start an oil price war aimed at destroying the U.S. shale producers and putting the “U.S. energy dominance” policy under threat, much to the OPEC+’s dismay. Concrete measures are yet to be announced but it is hard to imagine the U.S. government would react as strongly in a non-election year.
The Macro Teller: We have a health crisis here, not a liquidity crisis (although it’s likely that the former may lead to the latter soon). This isn’t something that rate cuts or free money can solve. Would anyone book a cruise, or a trip to Italy, right now if the Fed cut rates to -10% and announced a $10T QE? No! The market may cheer this, and stocks may bounce a little, but such steps are going to be very little to revive the real economy at this point. This time IS different in the sense that neither monetary nor fiscal policies can shift the balance. Only the virus-related data (new cases, death rate, geographic spread, etc.) may lead to a sustainable change.
Robert Honeywill: The US Presidential election – How this is addressed by either side of politics will be very impactful. President Trump apparently gathered a lot of votes by appealing to disadvantaged voters, such as in the rust belts of America. COVID-19 quarantine and isolation requirements for containment purposes will particularly impact the disadvantaged. These will include those without adequate medical cover and casual and other workers who will lose all income for a period, with no other means of support. The Fed’s actions – Symbolic at best, dangerous at worst. The world is awash with capital looking for a home – nearly 100% of the 120 dividend-paying companies I surveyed are engaged in repurchasing their own shares. They can easily defer repurchases to bolster liquidity, as Delta Air Lines (DAL) has already announced. The lowering of interest rates encourages further yield seeking, which creates dangers for investors, although I believe those dangers are likely a long way off.
Slingshot Insights: I think rate cuts will have limited/modest impact in this situation. Fiscal stimulus in terms of money supply is unlikely to induce economic action in the places most hit by fear and public policy. A more beneficial aid to this situation would be addressing what is going on with the economy and citizens of the world. Interventions on paid sick leave, industry-specific bailouts, increased funding of public health preparations, will actually smooth out some of the real economic issues occurring. The presidential election is a potential motivator for more populist stimulus, which in the situation of an outbreak I support. The largest risk from the Presidential election itself was removed prior to “Super Tuesday” when the Democrats solidified their choice of a moderate for the nomination. Any further developments with Bernie Sanders are a formality already priced into the market in my opinion.
From Growth to Value: As for the election, I look at it as a shareholder of The Trade Desk (TTD). Jeff Green, The Trade Desk’s founder and CEO of The Trade Desk, said that the elections had a positive effect on the results. For the rest, I don’t think of it that much. Presidents come and go, and people are too focused on politics when they should be concentrating on finding the best companies of our time. As for the Fed, I think it does a good job, better than it often gets credit for. And lower rates are, of course, positive for stocks. I don’t see TINA (There Is No Alternative) going away any time soon. By lowering the interest rates, the Fed showed that it is ready to step up.
Howard Jay Klein: Fed action will count. Election basically a non-event as it now appears Sanders is history.
Value Digger: We believe the uncertainty associated with the US Presidential election will weigh on the stock markets in the next months. Also, we believe the latest interest rate cut from the Fed was a short-sighted, irresponsible and ineffective move when it comes to stimulating the real economy. The Fed doesn’t have quite as much ammunition as it did during those dark days over a decade ago. Mortgage rates are close to all-time lows, other interest rates also are in the basement, and the Fed doesn’t have a whole lot of room to do much cutting. Therefore, things will become very ugly in the U.S. when the next Black Swan event hits the market.
Joe Albano: Yes. The answer is yes. It’s all intertwined and near impossible to untangle and point to one factor or the other. The markets move on the whole of information, and so each one of them affects the other. Election years are trying times in this country in the last decade; a lot is at stake. Any federal decisions could be political, or they could not be. Use the aggregate of all events in your consideration.
Victor Dergunov: It’s clear that this entire situation with the Coronavirus and a cascading stock market are not positive factors for the President and his reelection chances. Much of President Trump’s Presidency has been supported by an expanding economy and a melt up in stock prices. Also, the $30-$35 crude oil range is a problem. Gas prices will fall some, but how many jobs will be lost due to bankruptcies? What about the companies that loaned capital to the shale sector? Much of the sector seems to be built on junk bonds, and once the underlying companies start to file for bankruptcies these bonds may become worthless, and along with that come bank write-offs. Watch for the unemployment rate to go up from here and for the President’s reelection chances to go down. As far as the Fed is concerned, it’s great that they are cutting rates, will likely continue to cut, are injecting money into the system and will very likely continue to inject more. However, the effects of monetary stimulus will likely be limited in the short to intermediate term, and are unlikely to play a significant role in preventing a recession from transpiring in the U.S.
Ian Bezek: With Joe Biden effectively winning the Democratic nomination, political risk is largely off the table for 2020. A Biden presidency would not cause dramatic changes in government policy toward major sectors (energy, banking, health care) that were potentially in trouble in a more left-wing administration. As such, the Fed’s response to this correction is much more relevant to the market. Since the beginning of 2019, Powell has completely abandoned any previous hawkish tendencies. I expect him to do whatever it takes to support equity prices.
App Economy Insights: Interest rates are critical in determining stock valuations. The rest falls under “market sentiment,” it’s mostly noise and irrelevant to my long-term performance.
David Krejca: I do not watch those closely, so I have no opinion on that. However, excessive money printing seems to be beneficial and quirky at the same time.
Elephant Analytics: Now that Biden is very likely to become the Democratic nominee, the Presidential election will probably have less impact on the markets than the Fed’s actions. A Trump-Sanders matchup would introduce the possibility of significantly larger changes to items such as the corporate tax rate than a Trump-Biden matchup. If Biden wins, any changes would be more incremental.
KCI Research Ltd: Ned Davis Research has looked at this extensively, and obviously the incumbent, no matter the party, likes to prime the pump, so to speak with liquidity, however, COVID-19 certainly complicates, and perhaps enhances, that objective.
Thanks to our panel for contributing to this roundtable, and to you for reading! Tomorrow will feature part two of this, with questions about how to manage the behaviors around this story. Part three on Saturday will discuss more of ‘where do we go from here?’
See also Can Cintas Recover Lost Ground? on seekingalpha.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.