The U.S. Economy Created 273,000 Jobs in February… The unemployment rate dipped to 3.5%, matching a 50-year low.
What it means – With the spread of the coronavirus hogging the headlines, anything about last month seems as ancient news. That’s too bad because the decent jobs number is important. As long as employment remains steady, the economy will be resilient. The numbers from February were a positive surprise and bring the three-month average to +/-250,000. That’s not bad for an economy at nearly full employment. Wages ticked up a bit, but the annual growth rate eased from 3.1% to 3.0%.
Markets Seesaw on Virus and Political Concerns… The Dow started the week up more than 1,000 points, but then gave it all back, only to rise and fall again, as investors estimated the effects of the coronavirus and the changing Democratic presidential nomination landscape.
What it means – It’s an illness the market couldn’t shake. Not the coronavirus, but Sandersitis. With Bernie gaining momentum, investors worried about potentially radical economic changes if he took the White House. With fears of the coronavirus dimming global economic prospects, the markets sold off. Hope arrived with Joe Biden on Super Tuesday when the former VP took 10 of 14 states and the delegate lead. The euphoria was short-lived as investors turned back to fears Thursday over the coronavirus.
This week just proved that investors think in relative terms. Is a man who calls for raising personal and corporate income taxes a friend of the markets? He is when compared to a guy who wants to end all oil exports, slap a tax on financial transactions, and create a wealth tax. November is a long way from here, so expect a lot of volatility based on the changing political landscape.
As for the coronavirus, governments and companies in the developed world appear to be doing a good job of containment, but that also means they’re cutting into normal business activity. Expect a dramatic cut to earnings for the first half of the year which will impact stock prices.
Investors have not embraced the probability of a global slowdown. Dun & Bradstreet reported this week that 94% of the Forbes 1000 companies are struggling with supply chain disruptions. From tech firms to investment bankers, employees are telecommuting at company direction. Business and vacation travel is contracting. Hotel and resort businesses are contracting. Restaurants are closing. We expect continuing market volatility and more downside market risk. With more sliding prices on Monday, it is not likely that the biggest buyers will enter until value is greater.
Federal Reserve Cut Overnight Rate by 0.50%… In an emergency meeting, the Federal Reserve cut the overnight interest rate from a range of 1.50% to 1.75% to 1.00% to 1.25%.
What it means – The Fed is full of smart people. None of them think that lower interest rates will somehow change business activity affected by the spreading coronavirus. Instead, they’re aiming to keep the U.S. currency a bit more competitive by making it less attractive to international capital, as lower rates should bring in less foreign investment, so we can sell more exports.
Also, they’re playing a confidence game. Since the great financial crisis, many investors and everyday people think of the Fed as having control over the economy and financial markets. It’s not true, but perception is powerful. The central bankers wanted to send the message that they’re watching the situation unfold and will act decisively. Unfortunately, they used the term “emergency” which added market panic instead of calm.
This might backfire. The Fed cut rates on Tuesday, and the markets gave up more than 600 points anyway. This could be the moment when, like Dorothy in the Wizard of Oz, people realize it’s just a bunch of mortals at the central bank who can control a few bits of the financial markets, but they can’t manufacture consumption or “make” the economy do anything.
Interest Rates Fall Further, With the 10-Year Treasury Yield Below 1%… The 10-Year U.S. Treasury bond traded at 0.93%, another record low.
What it means – This is the third week in a row that we’re covering this because it’s important. Equities might be gyrating wildly, but interest rates keep trending lower, matching expectations of falling economic activity.
The move is killing savers, who will find it tough to buy enough safe investments to provide a decent return. An investor putting $1 million into 10-year Treasury bonds would earn a paltry $9,300 per year, about half the rate of inflation.
The continuing shift of capital into the bonds may indicate some investors are beginning to recognize fundamental problems in the stock market. By the time most investors realize their real risk exposure – it is often too late to do anything meaningful about it.
Chevy Ends the Impala, GM Pledges to Spend $20 Billion on Electric Vehicles… The company’s stock sits 10% below its IPO price from 2010. Talk about a lost decade! Now, GM pledges to build exciting electric SUVs, crossovers, pickups, and even a Hummer, while trimming its unprofitable line of sedans. Here’s something to think about.
If sedans are so bad, how is Tesla selling them like hotcakes? Maybe instead of spending so much on new electric vehicles, GM could carve out some cash to design sedans people want to drive instead of the tired econoboxes they’ve been making that look like almost everything else on the road.
Data supplied by Dent Research/Delray Beach Publishing
“When the facts change, I change my mind.
What do you do, sir?” ~ John Maynard Keynes
Our plan is “the plan will change.”
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Relative strength measures the price performance of a stock against a market average, a selected universe of stocks or a single alternative holding. Relative strength improves if it rises faster in an uptrend, or falls less in a downtrend. It is easily applied to individual positions in your portfolio and to sectors and asset classes.
A copy of our form ADV Part 2 is available online.
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