A Miserable March For Markets?

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Yun Li of CNBC reports the Dow falls 250 points, ekes out small weekly gain after a wild run
Stocks fell on Friday, capping a roller-coaster week on Wall Street, as the coronavirus outbreak kept investors on edge.

The Dow Jones Industrial Average cut losses rapidly in the final 10 minutes of trading, ending the day down only 256.50 points, or 0.9%, to 25,864.78. The 30-stock benchmark plunged 894.66 points at one point in the session. The S&P 500 dropped 1.7%, or 51.57, to 2,972.37, while the Nasdaq Composite fell 1.8%, or 162.98, to 8,575.62.

All three major averages eked out small weekly gains after a roller-coaster week that saw the Dow swing 1,000 points or higher twice. The Dow was up 1.7% on the week, while the S&P 500 and the Nasdaq gained 0.6% and 0.1%, respectively. The benchmarks are still in correction territory, however, down at least 10% from their recent peaks.

Friday’s declines came as the benchmark 10-year Treasury yield tumbled below 0.7% for the first time ever. Investors continued to seek safer assets amid fears that the coronavirus will disrupt global supply chains and tip the economy into a recession. Another haven asset gold had its best week since 2016.


The market remained under pressure even after a blowout jobs report. The U.S. economy added 273,000 jobs in February, beating expectations of 175,000 new payrolls last month. The unemployment rate also fell back to 3.5%, matching its lowest level in more than 50 years.

“Markets have not done well on Fridays because we are all expecting the situation to worsen over the weekend,” said Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management.

Energy is the worst-performing sector, down 5.6%, as oil prices plunged more than 10% to multi-year lows after OPEC’s allies rejected additional production cuts.

Airline stocks rebounded slightly, providing the broad market some cushion, after chief economic advisor Larry Kudlow said the White House is considering “targeted measures” to offset the negative impact on the industry from the coronavirus outbreak. United Airlines jumped 2%, while Delta Air Lines rose 1%.

The expanding health crisis kept investors anxious as global cases of the coronavirus infections surpassed 100,000 with at least 3,383 deaths around the world. In the U.S., at least 12 people have died of the disease. California has declared a state of emergency, while the number of infections in New York reached 33.

“The magnitude of the sell-off in the S&P 500 so far has further to go,” Binky Chadha, Deutsche Bank’s chief equity strategist, said in a note. “In terms of duration, just two weeks in, it is much too early to declare this episode as being done.”

President Donald Trump on Friday signed a sweeping spending bill of a $8.3 billion package to aid prevention efforts and research to quickly produce a vaccine for the deadly disease.

Treasury yields saw sharp declines this week after the Federal Reserve announced an unexpected 50 basis points cut from its benchmark interest rate. It was the central bank’s first such emergency move since the financial crisis more than a decade ago.
It's been another terrible week in the stock market and even though I wasn't going to post anything, I feel compelled to share some insights with my readers.

There's a lot to cover so I'd like to break it down in sections starting with the expanding health crisis.

COVID-19: Global cases on the rise but China's bold strategy working for now

Not surprisingly, number of confirmed cases of coronavirus has risen above 100,000 -- according to researchers based in the United States:
The Johns Hopkins Center for Systems Science and Engineering (CSSE) quoted several sources, including the World Health Organisation (WHO) and the European Centre for Disease Control (ECDC) in publishing its latest chart.

The number of people known to have died from the virus has risen from 3,281 to 3,408, the figures say.

The previous figures published on Thursday put the total number of confirmed cases at 95,000 COVID-19 cases globally.

France has reported another spike in the number of confirmed coronavirus cases -- up by 154 to a total of 577, the health ministry in Paris said on Friday.

Another two people had died, the ministry said, bringing the total number of deaths in the country to nine.

UN human rights chief Michelle Bachelet has warned that the worst off in society may "all too easily be pushed over the edge" by efforts to combat the virus. Lockdowns, quarantines and other measures could threaten livelihoods and lives and should always respect human rights, she added.

International stock markets fell again on Friday as fears about the coronavirus outbreak dominated trading.
It is particularly troublesome that Japan seems to be under-reporting its COVID-19 cases:



The only good news on COVID-19 is that China's bold measures to contain the virus are proving somewhat successful as cases there are finally declining, according to the World Health Organization.

China's success in battling COVID-19 has some experts wondering if this strategy can work elsewhere but others warn its success may be short-lived:
“There's no question they suppressed the outbreak,” says Mike Osterholm, head of the Center for Infectious Disease Research and Policy at the University of Minnesota, Twin Cities. Reducing the peak number of cases buys a health system time to deal with later ones, public health experts say. But once the restrictions are lifted, “It'll come roaring right back,” Osterholm predicts.
More worrisome, scientists now claim COVID-19 has mutated into two strains, one which appears to be far more aggressive:
Researchers at Peking University's School of Life Sciences and the Institut Pasteur of Shanghai, discovered the virus has evolved into two major lineages - dubbed ‘L’ and ‘S’ types.

The older ‘S-type’ appears to be milder and less infectious, while the ‘L-type’ which emerged later, spreads quickly and currently accounts for around 70 per cent of cases.

Genetic analysis of a man in the US who tested positive on January 21, also showed it is possible to be infected with both types.
Equally troubling is new research learning from Wuhan showing that when it comes to COVID-19, there's no alternative to containment:
Virtually all experts quoted in by media stated that a pandemic-like outbreak of COVID-19 in Western countries is becoming unavoidable. The declared objective is to spread out the epidemic over time. However, all available data from China in addition to the concrete experience of people in Wuhan and now Iran shows that this change of policy would lead to a horrendous situation. Due to the overloading of healthcare systems, most people coming to hospitals with severe and critical pneumonia, gasping for breath and chocking as a result of water accumulating in their lungs, will have to be sent home to die when they could otherwise be saved. Two figures, among others, indicate that even in case of an epidemic spread out over time, every healthcare system will be totally overwhelmed by the sheer number of cases. Even with optimal preparation and organization, it will be possible to only treat a tiny fraction of critical cases. In all of China, the spread of SARS-CoV-2 has come to a halt after less than 80,000 cases of infection, thanks to the tough measures taken since the second half of January. Most of them got infected before January 23. In many cases, their state deteriorated only progressively. As of Feb. 23, almost 10,000 people were still hospitalized and considered "severe" cases. Now consider that experts estimate that 40-70% of the adult population will get infected. This gives you an idea of the numbers we can expect. This virus kills slowly, but if patients don't get optimal care, it kills massively. Every outbreak out of control will overload even the best healthcare system, but it will do so incrementally, so that we don't realize it before it is too late. Then again, if we expand testing capacity now and make it efficient enough, we could keep this under control and have a normal life, including intense social and cultural activities, with few occasional cases that would get adequate treatment. The recent developments in mainland China, Hong Kong and Taiwan have shown this.
I want to underscore this point: "This virus kills slowly, but if patients don't get optimal care, it kills massively."

Yes, the majority of cases of COVID-19 are mild but some patients are more at risk than others of developing terrible complications that will kill them if they are not receiving optimal care.

COVID-19: What are infectious disease experts saying?

Last night, Dr. Anthony Fauci, head of the National Institute of Allergy and Infectious Diseases, appeared on a CNN town hall admitting they have not ramped up testing in the US yet because there aren't enough tests yet but that will change by the end of this week:



Dr. Fauci noted that "the overwhelming majority of the individuals will do quite well....however, about 15 to 20% of individuals --very heavily weighted towards the elderly and those with underlying conditions like heart disease, chronic lung disease and diabetes --  are really at considerable risk for a bad outcome, including death."

Dr. Fauci also stressed the need to test more patients so we don't confuse people with coronavirus versus those with the seasonal flu, and are thus able to practice social distancing more effectively.

Earlier this week, CBS News spoke to one of the top experts on viruses, Marc Lipsitch from Harvard University, who cautions that 40-70% of the world's population will become infected — and from that number, 1% of people who get symptoms from COVID-19, the disease caused by the coronavirus, could die.



Lipsitch stated this: "This is not an existential threat. This is, qualitatively, it's very much like a bad pandemic of influenza, which we experienced arguably twice or three times in the 20th Century. It's worse than the one that we experienced in 2009. But none of those brought civilization close to its knees. They made things awful for a while."

What has always bothered me is asymptomatic transmission and the fact that even people that exhibit mild symptoms can easily transmit it to others, something former FDA commissioner Dr. Scott Gottlieb stressed on Face the Nation last Sunday:
“A lot of people are asymptomatic or mildly symptomatic, but they shed virus and they're still infected. They can still transfer the virus and a small percentage get very sick. And so, it's probably the 80 percent that are mildly symptomatic or even asymptomatic that are the ones that are spreading it. The other thing is that people who get very sick, don't get very sick right away. The time to hospitalization in- in different studies was nine to 12 days. So they start off with cold-like symptoms and then they progressively get more ill. And it's in that phase that people are spreading it. There was a very interesting analysis in the New England Journal of Medicine about two weeks ago that looked at viral load and viral shedding across a spectrum of disease. And the people who are mildly symptomatic shed as much virus as the people who are very sick and that's atypical. Typically, the amount of virus you have and shed to- in- in some diseases comports with how much- how much of virus you have.”
That's why community spread is a real concern to health officials. All it takes is one infected person to spread the virus to others and this thing will spread like wildfire:


And it's this uncertainty which is driving fear and panic in the markets.

Also, Dr. Maria Van Kerkohve of the World Health Organization discussed mortality rates and the difficulty in determining it:



Update: Former FDA commissioner Dr. Scott Gottlieb appeared on Face the Nation Sunday morning and stated coronavirus cases will explode in the coming weeks and state and federal governments will have to shut down the economy:
"I think no state and no city wants to be the first to basically shut down their economy. But that's what's going to need to happen. States and cities are going to have to act in the interest of the national interest right now to prevent a broader epidemic. Close businesses, close large gatherings, close theaters, cancel events. I think we need to think about how do we provide assistance to the people of these cities who are going to be hit by hardship, as well as the localities themselves to try to give them an incentive to do this. Right now, if there's no economic support to do this, you don't want to be the first to go. And I think you're seeing that. This exposes one of the challenges of our federal system that we leave a lot of authority to state and local officials. And there's a good- there's good reasons why. But in a situation like this, we want them to act not just in their local interests, but the national interests, I think we need to think about both trying to coerce them. We can't force them but also try to provide some incentives in terms of support. And we're going to end up with a very big federal bailout package here for stricken businesses, individuals, cities and states. We're better off doing it upfront and giving assistance to get them to do the right things than do it on the back end after we've had a very big epidemic."



Not exactly reassuring to hear the US economy might need to be shut down if this gets out of control.

Markets need a coronavirus vaccine, fast!

This very brief discussion on COVID-19 allows me to shift my focus on markets.

By now, it's painfully obvious COVID-19 is the Black Swan event of 2020 and if it isn't contained fairly quickly, it will have far reaching ramifications on financial markets and the global economy.

I've said this before, and I'll say it again, "pandemics are deflationary". If you want to halt global economic activity fast, throw in a virus that spreads fast and can kill people.

While some think the market decline was driven by a panic narrative and that the silent spread of coronavirus might actually be a good thing, I've been far more cautious, always emphasizing how little we actually know about this novel coronavirus and how fast it's spreading all over the world.

Right now, there are two potential outcomes, both of which aren't particularly good for markets:
  1. COVID-19 cases steadily climb all over the world including the US, but as testing becomes more widespread, health authorities will be able to identify and treat patients more aggressively. After a few months, containment, social distancing, public awareness, and treatment will start working and the numbers will level off and start declining.
  2. COVID-19 cases explode all over the world and health authorities struggle to keep up as hospitals are overwhelmed in treating new cases. More people get infected, more people die, and it becomes a long, drawn out mess.
This is why some people think a coronavirus vaccine can't come soon enough as it's the only thing that will keep this bull market alive:



A vaccine will eventually be developed but I caution my readers, it won't stop this epidemic. Also, be careful jumping on the latest biotech stocks claiming to cure COVID-19, there's a lot of hype out there, the virus is mutating, and there will be no quick fix to address this pandemic.

Central banks to the rescue?

Speaking of quick fixes, central banks all over the world led by the Federal Reserve are responding to this coronavirus crisis by slashing their key rate by 50 basis points or more.

And given the turmoil in credit markets, you can expect more rate cuts when the Fed meets March 18th:






Some think the Fed panicked and that this emergency rate cut was a big mistake. In an op-ed to CNN, Lakshman Achuthan and Anirvan Banerji of the Economic Cycle Research Institute opine that the Fed is using up precious ammunition and that the US economy was not in a recessionary 'window of vulnerability' and could therefore weather this shock:
Going into the coronavirus crisis, the dozen-plus key leading indexes we monitor told us that the US economy wasn't in a window of vulnerability. Therefore, the shock of the epidemic hitting US shores wasn't going to tip the economy into a recession.

Importantly, housing -- a critical driver of the economy -- had already been strengthening, partly because mortgage rates were already near record lows before the rate cut. We didn't need even lower mortgage rates, which followed the rate cut, to shore it up.

Separately, manufacturing is actually in a better cyclical position than most realize. In the United States, the purchasing managers indexes, which many economists see as a timely proxy for industrial growth, are still holding above last year's lows, despite the supply chain disruptions caused by the coronavirus.
The authors end by warning we are headed toward the Japanification of the US economy:
Unfortunately, this week's Fed rate cut used up precious ammunition that it will need when recession -- rather than a market correction -- truly threatens. Our interest rates are now moving closer to zero, sending us down a similar path as Japan, which, despite negative interest rates and the Bank of Japan repeatedly purchasing massive amounts of both stocks and bonds, is now in its fifth recession since 2008.

That's what "Japanification" looks like: slow growth with repeated recessionary episodes. And the Fed has just stepped on the gas on the road to Japanification.
But not everyone agrees with the view the Fed is making a big mistake. In his latest Bloomberg comment, Jim Bianco of Bianco Research discusses why he thinks the Fed did the right thing but it's a whole new ballgame:
Over the last few days, as concerns mounted about the coronavirus and its impact, markets were pricing in a 50 basis-point interest rate cut by the Federal Reserve as early as this week. Central bankers obliged Tuesday morning by delivering this reduction. They did the right thing.

U.S. stocks, initially cheered by the news, soon reversed course — and indeed, some investors are asking what good this move will do. The Fed can’t print a vaccine, and others have correctly noted that this isn’t a problem created by monetary policy. All of this is true. But central bank easing can help cushion markets from becoming even more chaotic, blunt potential liquidity issues, and maybe prevent a crash as hundreds of inverse and short financial products have the potential to turn a decline into a rout from too much short-side speculation.

But what if markets plunge after the central banks move? Does this mean they wasted their bullets? This is true only if one believes the goal is to prop up markets and send them back to their mid-February all-times highs. Instead, I would argue that markets are signaling that the coronavirus is causing a secular shift in thinking. Central banks would be wise to manage this decline and not over-reach and think they can reverse it.

Leading the list of investor concerns that sparked the recent market slump is the experience out of China, South Korea, Italy, Iran and even the rest of the Middle East and Europe in dealing with the coronavirus. It suggests the U.S. should expect the number of cases to reach into the thousands. This should lead to widespread restrictions on travel and large gatherings (school closings, canceling sporting events), quarantines and enough loss of economic activity to push the U.S. economy into recession by as soon as the second quarter.

But bigger picture, the global supply chain, especially if more shortages develop in the coming weeks, will get a rethink similar to the worst-case scenario from the trade wars. This means de-globalization and returning manufacturing processes closer to home. Providing a tailwind for this will be a heightened populist anger that government mismanagement by many major economic powers contributed to this virus spreading more than it should have. Such de-globalization means a return of inflation, which has been dormant for decades, which in turn could be what finally halts the 40-year bull market for bonds.

Any pullback in bonds, after this last flight-to-quality rally on recession fears, would compress both earnings and multiples. Gone might be the days of the stock-market peak last month, when shares traded at a forward price-to-earnings ratio near 20, one of the highest ever. This was predicated on all-time lows in interest rates and globalization. Now a p/e multiple near 12 to 15 might be the order of the day. This is fancy way of saying stock prices could decline 20% to 30% and then have to overcome a secular rise in inflation and interest rates to achieve a new all-time high.

It is possible this is overstating the case. If this is wrong, we stay home for a few weeks and move on as if little has changed. We think such short memories, especially if the virus hits the U.S. as it did other countries, might prove to be wishful thinking.

Last week, the S&P 500 Index declined more than 11% for its fifth-worst week in the last 80 years. All of the other instances — the fall of France in 1940, the October 1987 stock market crash, the technology peak in April 2000 and the financial crisis in October 2008 — marked secular and long-lasting shifts. The 2008 drop accelerated a populist anger that produced, among other things, Brexit and President Donald Trump

We believe a secular shift occurred last week. People may have to go through the five stages of grief before accepting it.
I agree with Jim on the limited effect of rate cuts on the economy and financial markets and think it is wishful thinking to believe the S&P 500 will ramp up to reach record highs in spite of this virus, but I'm not exactly with him on his de-globalization argument and that inflation will come roaring back and put an end to the 40-year bull market for bonds.

I'm a deflationista and have been one for a long time. I always knew it was a matter of time before deflation strikes the US but I obviously couldn't predict a global pandemic would accelerate this trend.

And with crude oil prices plunging 10% on Friday, it's hard seeing any inflation on the horizon:



Update: In a speech this afternoon, Federal Reserve Bank of Boston President Eric Rosengren said policy makers should be allowed to buy a broader range of assets if they lack sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases.
“We should allow the central bank to purchase a broader range of securities or assets,” Rosengren said in a speech Friday in New York. “Such a policy, however, would require a change in the Federal Reserve Act.”

U.S. law currently limits Fed purchases to “any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.” That translates to buying U.S. government and agency debt and mortgages issued by federal housing agencies.
Wow, the Fed wants to start buying stocks directly, no wonder stocks ramped up into the close late Friday.

My name is Bond, LONG BOND!!

This leads me to my discussion on US long-term bonds (TLT) which have been making record highs as the yield on the benchmark 10-year Treasury sank to a record low of 0.676% Friday morning:



While I'm not surprised to see Treasuries rallying given the ongoing turmoil in US and global stock markets, I caution my readers the plunge in long bond yields to record levels was exacerbated by convexity hedging by big banks and mortgage funds hedging their mortgage books:



This convexity hedging is huge and that's why you tend to see yields overshoot on the downside when panic sets in.

In other words, I don't expect these record low yields to stay with us for long given the underlying US economy remains strong. I would be booking my profits on bonds and scaling into the stock market while maintaining a healthy allocation to cash.

Another point worth underscoring, the S&P 500 dividend yield is exceeding the 30-year Treasury yield by the most in history:



Also, as I stated last week, there's no question in my mind that global pensions are rebalancing their portfolios to sell bonds and buy more stocks, but this doesn't mean stocks can't go lower.

Perfect storm for pensions

I cannot stress enough how this is yet another perfect storm for pensions, especially if the situation deteriorates and assets keep getting clobbered and long bond yields keep plunging lower.

Pensions are all about managing assets AND liabilities. Record low US long bond yields effectively mean liabilities are exploding up as assets crater, a toxic cocktail for many chronically underfunded US public pensions struggling to meet their obligations.

The longer this situation persists, the worse off things will be for all pensions, especially chronically underfunded ones.

Time to buy the dip on stocks?

The flight to safety/ liquidity has been a boon for bonds but disastrous for stocks and while everyone is itching to buy the dip on stocks, my advice is not to rush in because you risk having your head handed to you.

When I look at the S&P 500 ETF (SPY), it looks oversold on the one-year daily chart but the weekly chart isn't oversold and signals more trouble ahead:




Of course, I'm paying close attention to the all important tech sector (XLK) because it led this market up and if it deteriorates, it will lead it lower too:



Big tech makes me nervous for a lot of reasons and the lower it goes, the lower the overall market goes and the higher the probability we enter into a prolonged bear market.

So far, the tech sector isn't in deep trouble as the ETF (made up 40% between two stocks -- Apple and Microsoft) remains above its 50-week moving average but that weekly chart above doesn't exactly inspire me as there will likely be more selling to go before it stabilizes.

In terms of sectors, Utilities (XLU) is the only sector managing to post a 3.2 % gain year-to-date as the overall market is down 8% (price not total returns):


Here too, I would caution my readers to be very wary of high dividend sectors (Utilities, Real Estate, Consumer Staples) which tend to outperform when long bond yields drop. There's a lot of flight to safety in these sectors but they too will be clobbered in a bear market.

What is really worth noting is the ongoing decimation of Energy (XLE), Financials (XLF), Materials (XLB) and Industrials (XLI) collectively know as "cyclicals". They are basically signalling a global recession lies ahead.

And if that's true, other sectors will follow them into the abyss, including the powerful technology sector.

Another point worth noting is what Michael Gayed recently stated on LinkedIn, namely, all this volatility in stocks typically isn't a good harbinger of things to come and signals a bear market is on its way:



Lastly, a few traders/ investors have asked me if it's time to buy airline, casino, cruise line stocks and I keep telling them the same thing: don't bother trying to catch a falling knife!

A perfect example is a cruise line stock like Carnival Corporation (CCL) which keeps heading lower and lower by the day:


Sure, it's oversold and can pop on any good news but that chart is so damaged that it will take months if not years before this stock regains solid footing and makes new highs. You can risk a little money here but if you're buying this big dip for big gains, you need strong intestines because it could sink a lot lower in the near term.

The point I'm trying to make is don't be a hero and walk into a land mine, you risk getting your head blown off, especially younger traders/ investors who have never lived through a bad bear market where there's literally nowhere to hide. 

Anyway, I wasn't going to write a comment today but felt compelled to write something given the turmoil in markets.

I kindly remind my readers to donate/ subscribe and financially support this blog using the PayPal options on the top right-hand side. I thank those of you who take the time to do so and support my efforts in bringing you daily insights on pensions and markets.

Below, Russ Koesterich, BlackRock global allocation fund portfolio manager, joins 'Closing Bell' to discuss how what he's telling his clients as coronavirus fears continue.

Second, Bianco Research president and CEO Jim Bianco joins The Final Round to discuss how the markets will fare as coronavirus cases continue to rise in the United States.

Third, CNBC's "Halftime Report" team is joined by Jeffrey Gundlach, CEO and co-founder of Doubleline, to discuss the Federal Reserve's emergency rate cut and the bond market's reaction.

Fourth, Mark Newton, Newton Advisors, looks at the tech charts. With CNBC's Brian Sullivan and the Fast Money traders, Steve Grasso, Brian Kelly, Karen Finerman and Guy Adami.

Lastly, Cornerstone Macro's Carter Worth breaks down TLT and BKX. With CNBC's Brian Sullivan and the Fast Money traders, Tim Seymour, Brian Kelly, Karen Finerman an Steve Grasso.

Update: Stock futures tumbled in overnight trading Sunday as investors continued to brace for the economic fallout from the spreading coronavirus, while a shocking all-out oil price war added to the anxiety:
Futures on the Dow Jones Industrial Average plunged 1,223 points, implying an opening loss of 1,271.78 points at Monday’s open. The S&P 500 futures and Nasdaq-100 futures also indicated significant losses at Monday’s open. The sharp declines in the futures market signaled more turbulence ahead after a roller-coaster week that saw the S&P 500 swing up or down more than 2.5% for four days straight.

Amid the market turmoil, investors continued to seek safer assets amid additional fears that the coronavirus will disrupt global supply chains and tip the economy into a recession. The yield on the benchmark 10-year Treasury note dropped below 0.5%, before seeing a slight recovery, last trading at 0.5225%.
Get ready for another terrible week, it's beginning to feel a little like 2008 and things can get a lot worse in the near term even if the Fed cuts rates to zero, which I fully expect along with another round of QE.




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