Wait! What happened now? What happened to the Biden Bump? Even the suspension of Lizzy Warren’s campaign did little to stop the bleeding. Stocks – it seems – are spinning out of control as the virus sweeps across the globe leaving governments and medical professionals at a loss over what’s next. Daily news reports of further spread are only keeping the flames burning. Now that it has hit the US, new reports re- veal that it has swept across the country – going coast to coast… leaving elected officials pointing the fin- ger of blame at the Trump administration – as if ANY administration (anywhere in the world) was going to be able to halt the spread of COVID19. And as usual – you always have a few that take advantage of the hysteria!

But again – let’s put this in perspective. Year to date, the Dow is down 8.4%, the S&P is lower by 6.4%, the Nasdaq is down by 2.4%, and the Russell is off 11%. This is NOT indicative of a crash at all… and while that sounds better, the media are reporting the selloff from the highs of the year, which paints a bit of a different picture…

As of the highs – hit in mid-January – the Dow is off by 12%, the S&P is down 11.6%, the Nasdaq (which reached a new high only one month ago on February 19) is now off 11.8%, while the Russell has lost 13%.

OK – there you go. While it is NOT the preferred return we have gotten used to, it is what it is. The indexes are trading back at levels in the summer/fall of 2019. So this is NOT what it appears at all. The only reason there is such angst in the markets is because the speed at which this ‘correction’ has happened. And that is fueled by a range of issues (this is not a complete list at all – just a taste…)

1. The unknown effects of this virus causing emotional reactions.
2. The unknown actions of new complex, leveraged ETF’s that are ‘untested’ in a stressed market – very much like the products that came unglued during the collapse of the markets in 2007-2010. And as the market goes lower, there are margin calls (forcing more selling), there are broken trendlines (forcing more selling), there are new reports about what this is going to do to earnings and GDP fore- casts around the world (forcing more selling), and there is this building ‘hysteria’ (forcing more selling).
3. The very idea that passive investing is just that – passive. So when something goes wrong – the algos just hit the SELL button and unload all of the constituents in that ETF with reckless abandon – fueling the selling.
4. The lack of a short sale rule that would blunt the waves of selling suggest that its elimination must be reconsidered in this world of complexity…
5. Again – the technology has allowed for everyone to access the markets whenever they want and post the events of 9/11, the US market place is very fragmented (11 exchanges, 50+ alternative ven- ues – another issue that is hardly discussed) causing chaos in the markets when the temperature rises – and the temperature is rising and the chaos continues…

Stocks got smashed again yesterday – as all of that feel good stuff from Wednesday seemed noth- ing but a distant memory… The Dow lost 969 pts or 3.5%, the S&P gave back 106 pts or 3.4%, the Nasdaq gave back 279 pts or 3.1% and the Russell gave back 52 pts or 3.4%.

Yes, it feels ugly as the market closed on its lows – which usually doesn’t set up well for the next trading session – and today is Friday – going into the weekend… and you know what that means.

As stocks declined, Treasuries soared as (global) investors ran to the safety and security of US govern- ment debt. The 10-year treasury breached 1%, then it breached 0.95%, then it breached 0.90%, and trad- ed as low as 0.8994% before settling in at 0.925%. Market pundits – Jeffrey Gundlach for one – are on CNBC telling the world that he sees the latest FED move as a rookie “panic driven cut” and expects that they will cut interest rates by 50 bps AGAIN on March 18, which he and I will stand up and say once again – WHY???

What is another desperate, panicky interest rate cut going to do? Nothing – A cut in rates is not going to stop the panicked, nervous, anxious market. In fact, it has the ability to create MORE panic and MORE anxiety as investors struggle to understand why the FED would cut rates by 1 full percent in 2
weeks. What do they know? What didn’t we know?

We are between a rock and a hard place. The sense is, if the FED cut rates again, the market will con- tinue to fall and if they don’t cut rates again the market will continue to fall. US treasuries, gold and utilities will rise because of the rush to ‘safety’ as the headlines continue to create even more panic.

Perfect example is the NYTimes today. Have you seen the latest headline? It’s obnoxious and does noth- ing to settle the mood!

“It’s Going to End in Death: Doctors Say the UK is Ill Prepared for Coronavirus”

Really? Is this helpful at all? Of course there is hysteria – how can there not be? And this is just one of the headlines that hit the tape everyday…

Look – lets’ think about this: it is a bit unnerving for sure. But people are NOT DYING IN DROVES… this is NOT the bubonic plague that wiped out half of Europe in the 1300’s. In fact, the only people who have died (and in reality – 3300 people around the globe is hardly a ‘plague’) have been people with compro- mised immune systems due to age or other health related issues. I mean – unless I’ve missed something – we have not heard about anyone dying that was healthy before they got exposed – have we? Up until now – here is what is happening in China where this all began…

“The vast majority of cases in China — 87% — were in people ages 30 to 79, the China Center for Disease Control reported last month based on data from all 72,314 of those diagnosed with Covid-19 as of Feb. 11. That probably reflects something about biology more than lifestyle, such as being in frequent contact with other people. Teens and people in their 20s also encounter many others, at school and work and on public transit, yet they don’t seem to be contracting the disease at significant rates: Only 8.1% of cases were 20-somethings, 1.2% were teens, and 0.9% were 9 or younger. The World Health Organization mis- sion to China found that 78% of the cases reported as of Feb. 20 were in people ages 30 to 69.

The death toll skews old even more strongly. Overall, China CDC found, 2.3% of confirmed cases died. But the fatality rate was 14.8% in people 80 or older, likely reflecting the presence of other diseases, a weaker immune system, or simply worse overall health. By contrast, the fatality rate was 1.3% in 50- somethings, 0.4% in 40-somethings, and 0.2% in people 10 to 39.”

You can read the whole story here

OK, so overnight the unabated selling continued as the ‘two viruses’ spread across the globe… Yes – there are two… the first is COVID19 and the second is “central bank policy”.

News headlines re-iterating the speed and spread of the virus and the frantic calls for more stimulus by global central banks continue to overwhelm the airwaves and the markets. Expected hits to the macro data continue to confound analysts as no one can really figure out what the ultimate effects are going to be (resulting in calls for more stimulus from central banks) and that lack of clarity over both viruses is causing the “shoot first/ask questions later” mentality…

It is clear that not one country is prepared to slow or stop the spread of this virus. But it is also clear that this is NOT the bubonic plague… so everyone should take a breath. Stocks in Asia fall more than 2% as the week ended, stocks in Europe are under fire as their day begins – headlines there report the UK’s first death and Italy’s 41st. Do you see this?

This morning, news that Russia is not supporting additional oil production cuts put forth by OPEC is caus- ing a new round of selling in the oil markets and the equity markets. US futures are under pressure. At 6 am, Dow futures are down by 700 pts, S&P’s are giving up 85 more points, the Nasdaq is off by 244 points, and the Russell is losing 36 points. Oil is collapsing, trading down 5% breaking $44/barrel. US 10- year Treasuries are surging sending yields to 0.795%… which is only adding to the pressure on stocks.

Businesses are working remotely, schools are being closed, flights are being cancelled and the S&P is about to break lower to test last week’s lows of 2855. Pressure on the markets forcing margin calls only puts more pressure on the markets – broken trendline supports puts more pressure on the mar- kets and the automation makes it all happen in seconds… Remember – there are collars on the markets. The first halt in trading comes as the S&P falls 7%, or 211 points… something that has never happened (yet). But there is always a first.

Take good care.

Kenneth Polcari
Chief Market Strategist, Consultant
kpolcari@slatestone.com