AG Macro Brief - 05 Mar 2020 A
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Part 1 (Part 2 is here)
Markets are moving very fast and it is difficult to get a good handle on the ultimate direction of the markets. So, one needs to take a holistic approach and look at it from multiple angles.
Since 1928, there were five market selloffs similar in speed and depth to what we have witnessed last week. For each one, the market was higher in two to three months after the fall. The 6 to 12- month outlook is a lot less clear, but the risk vs reward equation is modestly biased toward a positive return.
The specifics behind every correction are different, which goes without saying but there is one universal thing that unites all such declines. FEAR. When lightning-fast corrections happen, valuations take a back seat and emotions run high.
Let us look at another statistic. Since 1998, the Fed has unleashed 7 fifty basis points cut inter-meeting. These situations have produced mixed results and not an entirely clear cut trend.
But there are some important takeaways:
Stocks were predictably down in the two weeks before the Fed stepped in and lowered rates.
One month later the benchmark S&P 500 was in the green six out of the previous seven times.
Six months later, the index has been down five times.
A year later, the S&P 500 has been down double digits in five of the seven instances.
The main takeaway is that there is no golden indicator here. But as we are all students of history, it’s important to keep past performances of similar situations in mind when the ‘unexpected’ happens. As the saying goes, ‘history doesn’t always repeat, but it does often rhyme’.
On the political front, things are getting more clearer for the Democratic Party. Joe Biden has catapulted to pole position and I think other fence-sitters and sympathizers should back him up as their nominee. So, the markets rebounded yesterday with healthcare stocks making the lead. If it was still Bernie Sanders, healthcare stocks would continue taking a nose dive.
Yesterday, Congress also agreed to an $8.3 bio emergency package to ramp up the fight to contain, treat and ultimately find a vaccine for the coronavirus. More importantly, hospitals will get government funding for those virus patients that can’t pay.
As for the economy, I think something much bigger will likely be coming in a government spending package. Mnuchin yesterday said they are looking at ‘all tools’ to keep the consumer moving.
If Joe Biden is the Democratic candidate to fight Trump in the November elections, it could be one of the most ugliest elections in living memory. Both have been at each other’s throat for years and Trump will not want to mentally accept loosing to Biden. So, Trump will want to make sure he has not left any stone unturned in a bid to win a second term.
To be continued…
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.