Pro Perspectives 3/12/20

March 12, 2020

The pandemic threat has been clear in markets since mid-February.  The markets have been pricing in an economy that slows if not plunges temporarily, as a large portion of the population is either sick, quarantined, or trying to avoid getting sick.

But it took a while for the American people to wake up to the reality that has been playing out globally, and in global markets.  

I think that turned yesterday.  After refusing, for weeks, to call the coronavirus a pandemic, the head of the World Health Organization finally relented yesterday.  That seemed to open the flood gates.  But even with the President’s address to the nation last night, I suspect it became real for a pop culture-driven population when pop icons (Sports and Hollywood) validated it.   

So, today we get more widespread panic in markets as the broader population responds.  With that, stocks had their worst day since 1987.  

And that leaves us with this chart …

Stocks end the day on the lows, trading into this very important trendline from the 2009 lows.  This puts the index down about 28% from the highs.  Keep a very close eye on this big trendline support.  It has major significance, given it represents the recovery from the global financial crisis-induced lows.

As we know, the markets have been looking for the right policy response.  So far, they’ve given all of the signals they know how to flash (monetary and fiscal stimulus).  But based on historical observation, policymakers are better at reacting and fixing things that break, than they are at avoiding breakage through proactive policy.  

On that note, when markets start doing low probability things, as they are now, we tend to see things break.  The Treasury market started flashing one of those warning signals yesterday, with yields rising in the face of widespread market chaos.   The Fed responded today with a massive liquidity injection. 

So, we’re getting aggressive responses from policymakers on the economy and markets.  The other piece we’ve needed is visibility on a gameplan and action on the health crisis front.  Properly informing the public, without creating panic has been the needle the White House hasn’t been able to thread.  The public seems to get the message now.  

In this environment, if people aren’t sufficiently worried (enough to make efforts to stop the rate of spread), then we should be worried.  If people are sufficiently worried, then we can be less worried.