This morning the US Federal Reserve has thrown the kitchen sink at the markets – they have cut interest rates to zero (0 to 0.25%) and announced $700bn in money printing.
Market sentiment and individual opinions about the market are bi-polar at the moment. Someone told me at the weekend (after the 13% bounce on Friday) that they are going “All in”. One of our SMA clients (very happy with our service) has withdrawn their money because they now want to take on the investment role themselves and aggressively buy.
We have thought very hard about whether this Fed move is going to create a stock market low and whether we should start buying today. No is the answer. There are a few things holding us back:
- What has the Fed seen that we haven’t?
- Coronavirus has been the catalyst to finally take us to zero interest rates.
- No interest rate is a disaster for a lot of retirees as the risk-free return goes to zero and the real return goes more deeply negative. They are already losing money in cash.
- Negative interest rates are next and that’s a disaster for anyone with capital.
- The next step is money printing again and we still haven’t paid the price for the post-GFC decade of money printing yet.
- We are risking deflation, ingrained deflation.
- The Central Banks are now out of policy weapons. Nothing left. The economy will now turn to politicians and fiscal policy for salvation and as Japan taught us in the 1990’s and 2000’s, fiscal policy is like throwing showballs at hell, it will achieve nothing meaningful beyond budget deficit blow out and regular political change as government after government continuously fail to turn the economy.
- We have heightened economic certainty at the moment.
- There are a host of profit downgrades related to coronavirus that have not been quantified yet (have we had any at all?) – they are coming. Earnings expectations are in flux.
- The social impact of things like the US being shutdown have only just begun. The US is preparing for lockdown. Supermarket shelves are being stripped. If you think we have a problem with loo paper, gun shops in the US have seen queues around the corner as Americans stockpile guns and ammo. Ohio and Illinois have closed all bars and restaurants. It is taking six hours to get your bags and three hours to get through screening into the US airports. Trump has tweeted "Its Terrific" and “very good news”. It's not. The Fed can do what they like but this is going to get worse before it gets better. We have not seen the social end game yet so it's unlikely to be the stock market end game either.
- The biggest one day rallies in the market come during a bear market. We just saw a 13% rally in the ASX 200 from bottom to top (on Friday March 13th). That’s not a trend change, it’s a bounce in a very volatile market.
Our decision today is to STAY OUT. That’s our assessment of the current risk reward equation. Standing on the shore has a better risk reward than sailing in the storm. But you need to decide for yourself, because the reality is, we’re guessing, everyone is. If this is the bottom and you call it, you guessed. We’re guessing it’s not the bottom.
This is certainly a buying opportunity. Big corrections are almost never bigger than 50%. We have seen an over 30% correction from top to bottom so far. – the odds are:
- In a year’s time we will have forgotten COVID-19.
- The economic rebound when it comes will be quick.
- The stock market rebound will precede the economic rebound and will be even quicker.
- All we will remember is a market that dropped and popped.
- Here is the VIX Volatility index - we are back to GFC levels. If you are supposed to buy when others are fearful...we must be getting closer.
- The only game in town now is to time the buying.
- There is unlikely to be a clear ‘moment’. It’s unrealistic to think you can spot that.
- We will almost certainly progressively buy as the risk reward ratio improves rather than go “All in” on one day.
WHY IT MIGHT TAKE A WHILE BEFORE THE BOUNCE
The main variable is the depth of the GDP impact and the corporate damage, and how long it lasts. Until that is envisaged by investors the markets will not bottom. If we knew the size and timing of the economic impact exactly the market would price it in and bottom.
The problem is that for the following reasons the impact is likely to be prolonged not momentary.
This is the central chart, and its not good news for a quick recovery. This is from the CDC (Centre for Disease Control) and its on the media everywhere – it’s the “Flatten the curve” chart.
This chart is telling the Government that they need to enforce a lockdown as soon as possible and have it last as long as possible. This chart tells the Government that their primary focus must centre on the capacity of the healthcare system to handle cases. A percentage of patients will need hospitalisation and some will require ICU facilities (Intensive Care). We only have so many. The mortality rate will be significantly improved over the disease cycle if the number of cases that need to be handled by the health system are kept within capacity – are treated. To ensure everyone that needs treatment gets treatment Government has to prevent a rapid spread of the disease. They need to spread out the number of cases over as long a period of time as possible to flatten the peak so the peak cases are manageable. In Italy coronavirus spread too fast and the result was an overrun healthcare system and a higher mortality rate that there needed to be. The Government cannot be responsbile for deaths, so their only option is to stop spread.
From the stock market point of view, if the primary focus of the Government becomes the capacity of the healthcare system to cope then to hell with the economy, it is the rate of spread of the disease that matters (not the economy) and the Government can do something about that and it involves taking some economic damage, early, now, and its beginning. We can expect Australia (and the US and Europe) to go into lockdown pretty quickly and remain there until the coast is clear.
- The Government will focus on the rate of spread not the economy.
- The economic impact is secondary and not a priority.
- To slow the spread government will advise lockdown periods for individuals/schools/sports/gatherings/businesses. They have just called a State of Emergency in Victoria.
The conclusion is that the duration of the economic impact will be long not short.
There is a long long way to go in this story. We, like you, watched that bounce in the Australian and US markets on Friday the 13th March. We like you watched stocks jump 20% to 35% in two hours, and we like you have kicked ourselves for missing the opportunity. And we like you started thinking about buying (we are in 62% cash in our Growth SMA).
But we shouldn’t. Missing that quick rally is all that’s prompting us to even think about buying. Its FOMO not logic. Everything else says don’t. We are still in this storm.
That rip up on Friday was not the bottom, it was some fund manager somewhere who decided, maybe in Sydney, or maybe in a skyscraper in New York (Fidelity), to buy some SPI Futures in big size. We don’t know why, but my guess is that they too, were guessing, as Twiggy Forrest was guessing when he bought FMG shares this week (never follow emotional billionaires making gestures), and as we are guessing and as you are guessing.
On the financial front we should take the same tack as the medical advice at the moment – too cautious is better than reckless.
Meanwhile the FOMC cutting rates to zero and printing money is a scary development. These people have more informed advice than us, they can see what we are in for more clearly than we can and the FOMC, the RBA and the Australian Government are clearly seeing something we haven’t yet.
Optimism today might look really silly in a month or two when you, and those futures traders who caused last Friday’s bounce, are sitting at home sharing a bowl of rice with their kids whilst the stock market is shut.
Plenty of clickbait Cowboys will call the bottom every day. We’ll call the turning point in the newsletter when we think it’s time. Maybe after the avalanche of coronavirus earnings downgrades we haven’t even begun to absorb yet.
(This article has been updated as of 1 pm Mon 16th)
Read more from Marcus
Marcus Padley is the author of the Marcus Today stock market newsletter. To sign up for a 14-day free trial please click here.
Thumbs up for the update too. I have had to talk three people down from buying on the weekend, and they are not "sophisticated" investors. The buy the dip mentality is pervasive. We've got expiry this week and next, so that will add to the mix.
Hi Marcus, I've been cautiously buying a few of my favourite stock picks over the past few trading days. I'm trying to dollar cost average back in while the current panic persists. I find it impossible to buy stocks at there lowest point, so I just try and be consistent in my approach. I also agree that we haven't seen the bottom of this market. It worries me when governments starts buying up government bonds worth billions of dollars to try and control the interest rates and economic stability. Maybe all their other options are drying up? Crazy also to see that Americans are having a run on fire arm stores and ammo, fearing they're going to miss out, or run out. While here in Australia we're still fighting over toilet paper. Thanks for another great read, I always like your perspective.
"we'll call it in the newsletter when we think its time" … was just too persuasive so I signed up!
I remember Gomes Addams used to buy on the way down and sell on the rise. Then go crash his trains. Might be a good time to just sit and wait on the station!!
thanks for your insights Marcus, now we just have to wait , will look forward to your next update
Brilliant perspective, always love reading your wires! Thank you
I have enjoyed reading your posts since this crash began and I find myself nodding in agreement as I read. But I disagree that by focusing on health outcomes that the economic outcome is compromised. It is in the short term but not long term. Health and economic outcomes are of course intertwined. If you get infection numbers controlled, you ultimately protect the economy but yes it comes at a short term shock- look at the economic figures coming out of China. Better a short shock to the system through somewhat draconian measures to control infections than a prolonged downturn. Panic is rife but good outcomes are possible with good governance and policy imposition & execution. You only have to look at the result in Singapore, Taiwan and now South Korea & China. Singapore & Taiwan have very small infection numbers and they are controlled & were from the outset. South Korea & China turned their infection numbers around despite losing early control. Their economies are 'normalizing' despite short, sharp drops. I would suggest stimulating demand will stimulate a supply response and in turn markets. That's what governments do during war and it works. This is a war of sorts. It's not all doom. Yet.
Good article but let's keep in mind that a lot of top 100 stock prices have fallen 30 - 50% already so some of the slowdown is priced in. Not saying it's an outright buy either but don't let fear affect our judgement too much. CSL is holding really well along with WOW. I will keep dollar cost averaging my SG contributions into the growth option as I have a 15 year timeframe. My 2c anyway!
Thanks Marcus. That bell curve is interesting. School of thought in UK: go for the pink curve, get it over and done with in 2 months. Blue curve takes at least 6 months. Agree with everything you've said. The fallout is not over yet, and then we are left with debt. Will be a shame if we lose our *** credit rating. We are one of the few countries that still has that. I'm comforted that Australians are pretty good at making it through difficult times though. Agree with everything you've said.
Twiggy doesn't buy when he thinks his stock is cheap - he buys when he KNOWS it's cheap.
The Dow Jones Industrial Index is still 300% above its GFC low (Feb'09). In Australia, the ASX200 is only 45% above that low. Does that mean that the U.S. market is more robust or has just not fully come to terms with the economic fallout from this crisis?
Nod, nod, nod... Thanks Marcus. Enjoy your commentary, here and on radio over the years. I'm an Aussie living under a "Shelter-in-Place Order" in Chicago, invested in both Markets, with both hands on my own reins. I'm out of equities and in gold in US, which has also taken a bit of a punch-up. Some say it is because of the need of the big boys and girls to service of margin calls. Your thoughts?
Good thinking Marcus, I fully agree with your comments. Gerry Reitsma