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%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.