Special Tuesday Edition
Stocks fell over 1000+ Dow points yesterday for the first time since a brief market panic in early 2018. Indeed, many traders recalled the trading pattern similarities of the market weakness over the past week to that correction. But, while any decline brings out its own set of fears, February 2018 was different from today. The Trump tax cuts were just going into effect. The drop in 2018 followed an explosive upward move in the market. The correction was almost totally technical, one needed to ameliorate an overvalued state in the stock market.
Today, we have the coronavirus, rising concerns of a possible recession, central banks flooding markets with money bringing negative rates back into the picture, and then there is the specter of Bernie.
The virus likely will play itself out soon, although that isn’t a certainty. The extent doesn’t really vary from what was predicted a few weeks ago. It is just raw when you are in the eye of the storm. Pockets of concerns in Italy, South Korea and Iran need to be watched and dealt with. We all knew there would be short term economic damage, but it becomes real now that company after company are taking forecasts off the table and adjusting downward.
Fires burn down towns. They rebuild. But sometimes the damage is greater, and the recovery takes longer. Is it right for central banks to be accommodative and try to save the day? In the short run, yes. But banks have been overaccommodative for some time. Last summer, when negative rates were spreading, there were few signs they were working. Even with hindsight, there are few answers. Certainly, the countries that lived through negative rates don’t seem to be doing any better than the ones that didn’t. Simply said, negative rates are another uncertainty for markets to deal with.
Then there is Bernie. He is a real threat to markets if only a psychological one for the moment. Bernie’s rise mimics the Trump campaign of 2016. No one knows what to do about him. The alternatives are all weak and Bernie’s supporters are just as loyal as Trump’s supporters. Threats of disaster today also mimic the calls for apocalypse four years ago about a possible Trump presidency. Most of Bernie’s big programs will probably never see the light of day even if he is elected with a Congressional Democratic majority. But the fear is real, and it will hang over markets until the election.
So just maybe this time is different. We still have to worry about the virus. We have to worry about the impact of negative interest rates. We have to worry about rising recession fears. We have to be concerned about what a Sanders Presidency might mean.
I am not saying any of the storm clouds building will bring rain. Markets will rally as virus fears dissipate. But they were expensive to begin with and a correction was due. I have been saying that for some time. Sanders fears are probably much greater than a Sanders reality even if it could win. But this is the time to at least consider my 2-day rule. Don’t just dive in because you have been conditioned to buy the dip. This 5% correction could turn out to be 10%, or maybe even more. The fact that the virus is already waning in China is a positive, but it isn’t an all-clear. Democrats debate again in front of the South Carolina primary and this time it will be Sanders’ turn to take all the hits. Maybe that will make a difference or maybe it won’t. While Wall Street assumes a Trump win, four years ago it assumed a Clinton victory. Nothing is certain in politics.
Nibble if you see bargains. Clearly, there are some. But don’t try to pick the absolute bottom. Today could well be a volatile nervous session. It could even end up strong. It will be news dependent. But whatever happens today, if the market ends convincingly higher, there has to be follow through tomorrow to signal all clear. In that February 2018 correction the 1000+ point decline on Monday was only the first of two that week. Thursday saw another 1000-point drop. And while markets recovered quickly after that, this time around we have to rejigger 2020 earnings forecasts accounting for the virus impact. Therefore, make your shopping list, nibble a bit if you want, but exercise discipline and patience. We will know a lot more about the Democratic race after Super Tuesday March 3. Hopefully, the virus will be starting to decline worldwide by then. If all goes well, stocks will recover. But there are more ifs this time around and, therefore, more caution is warranted.
Today, comedians Chelsea Handler and Carrot Top are 45 and 55 respectively.
James M. Meyer, CFA 610-260-2220