Monday – March 2, 2020

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Market opens higher after another wild overnight session. It came after the worst week for the Stock Market since the Financial Crisis. The S&P fell 15% in just over a week. Interest rates kept falling, with the 10-Year Treasury approaching 1%. The 30-Year is at 1.64%. Both are fresh, all-time lows. The spread of the coronavirus continues to expand in the US. The number of deaths is at two. Conferences have been canceled around the world, which is going to have a profound impact on airlines, hotels, restaurants, transportation, etc, all the things they drive economic activity. The Fed came out and said they planned to provide support to the Economy, but didn’t say how. The Market has already priced in a 50 bp cut, but with rates continuing to fall, a 75 bp cut is probably what’s needed. The problem is, they don’t have as much ammunition now after bailing out the Repo Market last Fall. A recession in the US is looking more and more likely this year. We thought it would be avoided, but a slowdown was certain. The historic economic expansion has been running out of steam, but the coronavirus could very well induce a recession fast. The Market is trying to digest it all, which explains some of the hyper-volatility. Earnings are very likely to stall, with no growth again in 2020, and actual contraction is highly possible, if not probable. This Monday bounce is fueled by hopes that central banks across the world will deliver interest rate cuts. Like the Fed’s Jay Powell on Friday afternoon, the BOJ’s Haruhiko Kuroda on Sunday promised necessary action to support markets. Stimulus bets saw China lead gains across Asia, with the Shanghai Composite closing up 3.2%, despite the first look at the economic toll the coronavirus has taken on the country. Fresh data showed Markit/Caixin’s China manufacturing PMI dropping to 40.3 vs. 51.1 in January, while the official PMI from the National Bureau of Statistics slipped to 35.7 – the lowest level on record. China is in really bad shape. Remember, it’s the second-largest economy in the world, and trades with everyone. Stocks are higher. Bonds are higher. Gold is higher. Oil is higher. The Dollar is lower. All of this can reverse in an instant. We think eventually it does. We plan to stay active in this challenging environment. We still have double-digit cash positions in place for cushion.

Have a great morning,

Mike Frazier

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