The Global Stock Markets have declined this past week somewhere between -10% and -13% depending on which index you look at. For us here in the US, where the Dow Jones Industrial Average is one of the most widely quoted, that translates to close to 4,000 points down. “Ouch” doesn’t really capture the growing concern.
If we leave the Global human cost aside for the moment, we have to ask: “Why is this disease causing worldwide panic?” And we shouldn’t be lulled into denial here, the world’s governments and business organizations are taking extraordinary steps to block the spread of this disease. Prior global infections have not caused such extreme interest and worry, nor have they caused such negative market reaction. Why this time?
Because we haven’t seen the phenomenon for a while we might not recognize what the economists call a “supply side shock.” That is when goods, and now even services, are not available when the next stop on the “supply chain” needs them for normal production of their goods or services. If the parts needed to produce the component part of the vehicle can’t be shipped because the factory in South Korea has been closed for several weeks, now the factories in the US or Germany cannot make their production deadlines. Trade grinds to a severe slowdown or even a halt. I recently heard there are 60,000 shipping containers held in the wrong ports. We saw this in the extreme as the financial crisis dried up credit in 2008 which, in its own way, cut off worldwide trade.
The increasing fear is that the coronavirus caused “supply side shock” will be accompanied by a “demand side shock” as well. Disease causes panic in the way that lack of credit in 2008 we did not experience. We may be witnessing a rarely seen confluence of supply side and demand side shocks rapidly spinning together, and not in a good way.
Traders look to the market Futures to see if any stabilization might occur. As of this writing on March 1, 2020 there is a mixed picture. Tech heavy NASDAQ futures are positive, the S&P 500 Futures are down slightly, and the DOW Futures are down another -.85%. (Bloomberg.com)
the Federal Reserve will ride in like the cavalry and save the day – the Powell Put will prevail – No? Maybe not this time. Yes, the Fed will likely lower interest rates as they have in the past when faced with a rapidly declining market. This time, however, ¼ or even ½ of a point will probably have little effect on how these worldwide shocks play out. The Fed lowering the Fed Funds rate by even .50% will not solve the problem of auto component parts not getting to Germany. If cruises are cancelled, major sporting events and cultural events postponed, the economic impact of that lost revenue will not be recouped, no matter what the Fed does.
We have told clients we were building some cash cushions in their portfolios in order to have cash reserves with which to buy when the market corrects. I can say that the velocity of the correction at this point suggests there may be more pain to come. We are not fans of catching a falling knife. We will be patient.
This time is not different. The global markets will rebound. The question for us all, investors and advisors alike, is the length of time it will take for the uncertainty of this pandemic to pass.
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