Market Fallout – 3.2.20

The sell buttons were pushed hard late Thursday. What seemed to be a moderate down day turned into a water fall event sending the broad averages decisively negative for the year with the S&P 500 standing at a negative/minus 7.5%. The 12% decline from the peak puts the market into an ‘official’ correction (decline of 10% or more), similar in depth to past market sell offs.

The market was due.

This is the CNN Business Fear/Greed Index, determined by a dozen technical indicators that measure market movements. I’m not at all surprised that pandemic fears on business activity translated directly into the sell-off in equities and stampede into the safety of bonds.

Although the economy hums along at a 2%+ growth rate, valuations were stretched from the ~30% run-up in 2019. The introduction of the pandemic sent sell signals into the machines and ‘sell-everything’ orders into the market, reducing prices to more reasonable and historical levels.

December ’18 witnessed a similar straight down market move…that being related to a Federal Reserve destined to kill the economy with higher rates. Reason prevailed with calmer tones and eventually two rates cuts in early year ‘19.

The diversity of the US economy brings both strength and durability. Here locally, owing to a tight labor market and demand for spirits, Napa county’s unemployment rate dropped below 2%. 2%! The tight labor market has driven warehouse wages to $20 – $30 / hour, or $40k – $60k per year. Remarkably, blue-collar wages have experienced the highest rate of growth in the US during the past 2 years (see chart below.)

“The coronavirus now looks like a pandemic. Markets can cope even if there is big risk as long as we can see the end of the tunnel,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “But, at the moment, no one can tell how long this will last and how severe it will get.”

So, easy to imagine the markets continuing to pump and skid along for a quarter or two, but any sign of a let up in rate of infection will bring a sense of value and money flows back into stocks, and out of the safety of bonds.