Art Hogan’s Market Commentary – March 23, 2020

Morning Commentary

There are a lot of things that you can say about last week’s market action, none of them are very good. Global markets are moving at lighting speed to price in the economic damage that will certainly follow in the wake of the coronavirus spread. The Dow Jones Industrials are down over 10000 points, or 35% over the last month, punctuated by a 3000-point plunge last Monday. The S&P 500 and Nasdaq have had similar salacious descents.

Last week’s recap had the Dow down 4011 points, or 17.3%. The S&P 500 was off 406 handles, or 14.96% while the Nasdaq shed 995 points, or 12.64%. The selling accelerated into the close on Friday, the last day NYSE floor brokers and traders will be at the stock exchange for the foreseeable future as they move to complete electronic trading. The day’s selling was exacerbated by is called Quadruple Witching day, which refers to a date on which stock index futures, stock index options, stock options, and single stock futures expire simultaneously. That led to an unwinding of a lot of positions and heavy selling to close an intense week.

U.S. markets had their worst five days since 2008 and are on track for the worst month since 1987. It wasn’t much better for global markets either as the economic impacts of the coronavirus continue to amplify as businesses close, consumers pull back on their spending, and layoffs begin. Equity markets tend to react early and intensely to external shocks. But this is clearly becoming an economic shock that will have a profound impact on millions of people around the world.

On the policy front the Federal Reserve is expanding its asset-purchasing program to include municipal debt. Cities are going to need to spend huge amounts to fight the disease outbreak itself and still more to help their citizens and businesses stay afloat. The Fed is sending them a clear message: You’ve got our support to borrow and spend. Global monetary and fiscal policy will help cushion the blow to the global economy in the medium term, but as of yet, they have offered little solace to nervous investors in the short term. Appropriate health care policy, including ensuring that there are enough test kits available, that sick patients without health care coverage can receive treatment, and that those deciding whether to miss work can afford it would go a long way. So would measures to increase surge capacity in terms of ventilators, hospital beds, and protective equipment for medical personnel.

Unless and until we see the number of new case reports hit a peak, like they have in both China and South Korea, we are likely to stay in the roller-coaster like volatile market environment. We will get there and markets will recover. You can track the Coronavirus on the Johns Hopkins Website Here

All bear markets come to an end, eventually. It feels extreme now because it is. But bear markets are a natural part of the market cycle, and while this one was brought on and inflamed by a global health pandemic, it will pass one day. In the meantime, remember to take care of yourself and your families. We all need each other right now. Stay safe and follow CDC Guidelines for preventing Covid-19 spread CDC Guidlines Don’t panic, Rebalance; talk to your financial advisor; stick to your strategy; and if this type of market volatility has you up at night, recalibrate your equity exposure to match your risk tolerance

Other News:

Republicans and Democrats in Congress stumbled in their attempt to engineer a quick jolt to a sinking economy with a $2 trillion stimulus despite the rising coronavirus death toll, plunging financial markets and dire predictions of a deep recession. Negotiations to break the impasse over the stimulus legislation continued into the night Sunday after Senate Democrats voted to reject Majority Leader Mitch McConnell’s latest version of the plan, which had been the product of frenzied bipartisan negotiations a day earlier. Senate Democratic leader Chuck Schumer met several times Sunday night, including at 11:45 p.m., with Treasury Secretary Steven Mnuchin, who has been conducting what amounted to shuttle diplomacy between the two sides. While many details of the plan had been hashed out, some fundamental differences hadn’t been bridged. The recriminations began immediately after McConnell’s bid for a procedural vote failed.

U.S. banks have plenty of capital piled up that can let them boost lending as clients come calling to cope with economic disruption caused by the coronavirus. Capital buffers at the biggest U.S. banks should give them the ability to increase lending by $1.6 trillion, according to Bloomberg calculations. By deploying their excess capital, the eight largest lenders alone could expand their balance sheets by $1 trillion.The Federal Reserve has encouraged the nation’s leading banks to use so-called management buffers — capital that’s in excess of required regulatory minimums — to boost the economy. Firms can also dip into capital conservation buffers, a move that would restrict payouts to shareholders.

Corporate borrowers worldwide — mostly from the U.S. — drew down about $71 billion from revolving credit facilities last week, a near seven-fold jump from the week before. Since March 9, companies have drawn $82 billion of revolvers, Borrowers are turning to revolvers, which are typically undrawn, because the spread of the coronavirus has triggered a rush for liquidity. Airlines and the air transportation sector have made the most drawdowns since March 9, at $21.65b; Autos is the next most active industry at almost $16b, mainly due to Ford making a $15.4b drawdown — the largest by any company; Brewer AB InBev drew on a $9b revolver, raising the European total to $11.3b

The Week Ahead:

Monday – 8:30 a.m. Chicago Fed National Activity Index

Tuesday – 9:45 a.m. Markit Manufacturing PMI flash; 9:45 am. Markit Services PMI flash; 10 a.m. New home sales

Wednesday- 8:30 a.m. Durable goods; 9 a.m. Housing price index

Thursday- 8:30 a.m. Jobless claims; 8:30 a.m. Q4 GDP [final]; 8:30 a.m. Advanced economic indicators

Friday – 8:30 a.m. Personal income/spending; 8:30 a.m. PCE price index; 10 a.m. Consumer sentiment

Upcoming Catalysts:

Flash PMIs for Mar – Tues 3/24.

Georgia primary – Tues Mar 24.

Int’l Research Forum on Monetary Policy at the ECB – Mar 26-27.

North Dakota convention/caucus – Fri Mar 27.

US jobs report for Mar – Fri Apr 3.

Alaska, Hawaii, Louisiana, Wyoming primaries/caucuses – Sat Apr 4.

US bank stress tests due to the Fed by Apr 6.

Wisconsin primary – Tues Apr 7.

FOMC meeting minutes (from the 3/18 meeting) – Wed Apr 8.

GILD coronavirus drug (Remdesivir) trial results will be made public Apr 27 in China

Connecticut, Delaware, Maryland, New York, Pennsylvania, Rhode Island primaries – Tues Apr 28.

OPEC meeting – June 9-10.

G7 Leader’s Summit – June 10-12. Camp David.

Fed will publish bank stress test results by June 30.

Fed will communicate its new monetary policy framework – first half of 2020.

Democratic Convention – starts Jul 13 in Wisconsin.

Summer Olympics in Tokyo – scheduled to begin Jul 24.

Republican Convention – starts Aug 24 in Charlotte.

Jackson Hole Conf. – likely to begin Thurs 8/27.

First US Presidential debate – Sept 29, 2020.

First (and only) VP debate – Oct 7, 2020.

Second US presidential debate – Oct 15, 2020.

Third US presidential debate – Oct 22, 2020.

US election – Tues Nov 3, 2020.

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