28 Feb A POSSIBLE SCENARIO?
The S & P 500 was on pace for the worst week since the 2008 global financial crisis. The yield on 10- and 30-year Treasury traded again to all-time lows. Fed Funds futures contracts have fully priced a rate cut in April and another one in July.
Partially the result of supply chain disruptions for both Apple and Microsoft, Goldman slashed its outlook for US company profit growth to zero.
Data released yesterday indicated momentum for the US economy but this data was pre-corona and many are declaring the upcoming data will indicate a decisive slowing.
No one knows the ultimate direction and outcome of the coronavirus. I still believe there will be a V shaped recovery—the consensus view just three days ago—an outcome that I think could challenge immediate inflation expectations.
As noted the other day, inventories have been exhausted, supply chains damaged, and both must be replaced or repaired.
Inflation is a two-part phenomenon…too much money chasing too few goods fearing higher prices tomorrow.
I ask will inflationary expectations increase when production/demand returns? Because of the just in time inventory cycle that emphasizes global supply chains for cost containment, the production process can evolve into an inflationary catalyst, the result of a sharp and sudden increase in demand. If this scenario evolves, will profit margins be destroyed?
Is this a radical thought?
To the best of my knowledge the above scenario has yet been considered as the discussion has been myopically focused on an anticipated slowdown.
Returning back to yesterday’s market activity, markets closed at lows for the day, falling the most since August 2011. The S & P 500 and the Dow Jones have violated their 200-day moving average line. The NASDAQ is quickly approaching this pivotal level.
The speed at of this reversal is deafening. All averages are negative for the year. The NASDAQ is the only major index that is still posting a moderate 52-week gain.
Since the apex about five days ago, the three major averages have declined about 12.5%.
I think it is noteworthy that according to Bloomberg the Dow lost 500 points in the 45 minutes following the California headline.
Some have written a capitulation is at hand. Perhaps for some sectors/companies, but as written many times stock prices could defy rationalizations. Prices will stop dropping when all believe there is only one direction…down. In my view for the averages/major indices we are far from this definitive inflection point.
What will happen today?
Last night the foreign markets were down. London was down 3.24%, Paris down 3.02% and Frankfurt down 3.66%. China was down 3.71%, Japan down 3.67% and Hang Sang down 2.42%.
The Dow should open moderately lower. Fear is rising but I could make a case because of the speed of the decline many have not yet realized the carnage that has ensued. The 10-year is up 13/32 to yield 1.22%.