Things you need to know:

• Irrational Exuberance? Markets suddenly take a second look?
• FED Vice Chair Clarida makes it clear: There is NO guarantee of a CUT in June
• Algos and day traders throw a fit. Dow plunges, falling 1% as the algos test the will of the markets
• Suddenly, everyone is concerned about COVID19 (of course they are)
• Try the Gemelli – Tossed with Shrimp, grape tomatoes in a pesto cream

KENNY POLCARI, Editor, Chief Market Strategist and Consultant

Yesterday I brought up the whole Irrational Exuberance conversation, and if the surge in the market and certain names was getting to be a bit “out of control” causing some assets to form “blow off tops” (A: Yes).
Guess what? It is irrational at the moment. Not that the market can’t go higher, it can (and will) but let’s be serious. While the US economy seems to be cruising along just fine, parts of Europe are still struggling, and the latest news surrounding the coronavirus keeps getting worse.

At about 11 am, CNBC’s Wilfred Frost airs a one on one interview with FED Vice Chair Ricky Clarida. In that interview, he (Clarida) made it very clear that there is NO definitive decision to CUT rates in June (as the market expects). At the same time, headlines were hitting the tape that the coronavirus is showing little chance of slowing down (causing the markets to suddenly care about it) which is starting to lead to some companies to “warn” of downside risks to this quarter’s earnings and guidance. Toss in the stronger than expected economic data and you then begin to wonder how the FED could even consider cutting rates.

Before you knew it, we saw the Dow go from +20 to -300 in the matter of 20 minutes.

And then the Dollar, which I don’t talk about enough, broke out of Wednesday’s high (which was al- so the October high) and surged up 17 cents to 99.879, just aching to kiss 100! And this presents a whole other set of concerns. A stronger dollar will hurt the earnings of the big multi-nationals, which means that either those earnings will need to be slashed, or they will all report a miss (unless of course they have hedged those earnings). As the dollar gets stronger, we can expect to hear from (you know who) who will scream and yell at Papa Jay (Powell) about how rates are too high. It’s like a broken record.

In the end, the indexes ended the day lower, but well off their lows, with the Dow down 128 pts, the S&P down 13, the Nasdaq down by 66 pts while the Russell rose 3 pts.

Overnight new reports show that while the state media in China says the virus is “slowing,” reality is that it is not the truth. Beyond that, new cases outside of China (think South Korea and Japan) are increasing. This morning Bloomberg runs with this headline:

“Virus Epidemic Enters NEW phase as Cases Outside China Multiply”
In this article, Jeff Sutherland points out that outbreak is entering a “concerning new phase” as “signs of infection are spreading more rapidly” beyond China’s borders and this is causing the latest retreat in stock prices as investors now have to reconsider the impact of a virus that appears to be out of control.

And a CNBC article reveals:

“Hundreds of New Cases Stem From Chinese Prisons.” Two of which are located in Hubei and two others located outside of “ground zero.”

Japan announces that automakers are postponing any restart of plants in China as virus fears do not subside. Retail sales of vehicles in China plunge, of course they did, car dealerships are closed and the streets are empty and the country is quarantined. Who is going to buy a car? In fact, expect to hear that all retail sales will take a hit. I mean who is buying anything but maybe food right now. Are the Chinese going out shopping at Tiffany’s or Bulgari? Are they spending money on clothing? Are they buying new GE and WHR appliances at the moment? My guess: probably not (but what do I know).

So expect to hear more companies lower guidance and slash first quarter estimates for the reporting period that begins in April. Listen as they explain that they too are unable to quantify the impact (like Apple did) just yet, etc. But none of this should be a surprise. The surprise is that while this was go- ing on. The algos chose to ignore it and sent US stocks soaring. That’s the part that makes no sense because this is becoming much more of a problem for so many companies. (Temporary or not).

Now what we do need to remember, is that while the virus is impacting global trade now, it is not de- stroying demand, it is just delaying demand. So underneath it all, we are just shifting the action to the spring and summer. So that is a positive, but that does not mean that the market can’t go down as investors re-assess the risk. There is no need to “feel like you’re missing out” there is plenty of time to invest.

Overnight in Asia, China now tells us that “the resumption of work is rapidly increasing in two of the major provinces: Guangdong and Jiangsu.” (Again, suspect…) This is significant (if true) because Guangdong and Jiangsu are two of the major centers for Chinese exports in 2019. That left China’s Shanghai index up 0.12%. Elsewhere in Asia, markets under pressure as the virus spreads. In South Korea SK Hynix has quarantined 800 workers after one of them was found to be in contact with an infected person. New cases of the virus have surged in recent days putting South Korea in the number two spot as the country with the highest cases outside of China – leaving the Kospi Index down by 1.4%.

Japan lost 0.39%, Hong Kong -1.3% and ASX down by 0.33%.

European markets are DOWN this morning. Do I need to explain?

FTSE 0.61%, CAC 40 -0.54%, DAX -0.13%, EUROSTOXX -0.35%, SPAIN -0.73% and ITALY – 0.76%.

US futures are also under pressure. Go figure! Dow futures pointing to triple digit losses of 128 pts, the S&P -18 pts, the Nasdaq lower by 55pts and the Russell is -6 pts. The risk off tone is permeating global markets. It is also Friday. The weekend is coming, so do not be surprised to see a repeat of the last three Fridays that see the markets end in negative territory.

Economic data today includes: Markit US Manufacturing and Services PMIs will be released at 9:45 am, expectations of 51.5 and 53.4. These are good numbers. North of 50 suggests EXPANSION and that is just another set of strong macro numbers, putting more pressure on the FED to stand down and stay put.

Look, the economic data is good. Wages are growing, unemployment is at historic lows, job creation remains robust, manufacturing is coming back to life, inflation remains under control and that’s great for us and speaks volumes about how the US economy is firing on all cylinders. As a result, it attracts capital from everywhere, and that pushes stock prices higher, bond prices higher gold prices higher and the dollar higher as well, as global investors search for yield. Stock prices go higher because investors are looking for growth and opportunity, bond prices go higher be- cause global asset managers are aching for yield (currently 1.5%) while others are looking for a safe haven. The dollar is moving higher because interest rates are positive and the sense is that the US is less exposed to any slowdown in global trade and it broke out of its recent high, sug- gesting that we could see the dollar index advance to 100.5 in the days ahead. Gold is up another $16 (also breaking out of its most recent highs), trading at $1,637/oz. as virus fears continue to push that up, although the trend line does suggest this should be resistance here. And by the way, Palladium, Silver and Platinum are also having a great week.

Oil, which has bottomed out at $50, rallied nicely in the past two weeks and is under a bit of pres- sure going into the weekend as we see some profit taking after the 8% surge. That makes sense, especially after the latest virus alerts is causing the whole demand fear conversation to take on new life.

The S&P fell 12 pts yesterday closing at 3373. This morning, with futures down 13 pts, we will once again look to test the Tuesday lows of 3357, a break there will take us back to 3300.

Saturday is the Nevada primary. It will be interesting to see how Bloomberg does as he isn’t on the ballot (think write in). Lizzy Warren announces this morning that she is NOW WILLING to take Super PAC money to try and save her campaign (something she blasted everyone else for do- ing), blaming her fellow democrats for not playing by the rules (that she set). She realized that if she wants to continue, she has NO choice but to accept the money and then become beholden to special interests. Funny how that works. Love to watch them have to eat their words!

Next Saturday brings us the South Carolina primary and then it’s on to Super Tuesday on March 3rd. Strap in, it’s gonna be an interesting ride.

Take good care. Have a great weekend.