Yesterday, the Fed took massive action toward curbing the impact of the coronavirus, yet as I write Monday, markets are in a freefall. Here’s what our analysts are saying

 

Yesterday, the Federal Reserve took an historical step by slashing its target rate to essentially zero (now at 0% – 0.25%), and launching a massive $700 billion quantitative easing program, buying Treasuries and mortgage-backed securities.

From the Fed’s statement:

… the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses.

Below, you can see a history of the Fed’s interest rate moves since 2015.

 

Despite these efforts, markets are reeling as I write Monday early afternoon. The Dow is down over 10% with the S&P and Nasdaq not far behind.

As you might imagine, investors are continuing to rotate out of stocks and into bonds. The yield on the benchmark 10-year U.S. Treasury note fell to 0.770%, from 0.946% at Friday’s close (yields drop as bond prices rise).

The explanation for why this massive effort from the Fed isn’t placating markets is because it appears to be a sign of desperation, which simply ratchets up the collective fear.

Given this, the question suddenly facing the market is “If 0% rates from the Fed and $700 billion in quantitative easing won’t appease the markets, what will?”

Perhaps “a vaccine” is the only answer.

Over the weekend, U.S. cases of coronavirus jumped to 3,774 and 69 deaths. As I write, the number of cases in the U.S. is 4,138 according to the Johns Hopkins Coronavirus Resource Center.

The spreading virus is now leading Americans to empty grocery store shelves and hunker down at home. Unfortunately, if this doesn’t change soon, it will take a substantial toll on the economy. Goldman Sachs now forecasts a 5% drop in U.S. GDP in the second quarter.

The fear is that the massive shutdown of businesses across the U.S. for weeks — possibly months — could cause many service-industry companies to collapse. That could result in a brutal cycle of rising unemployment, falling consumer spending, more businesses collapsing, and widespread economic strain.

If we look to China as a proxy, data from overnight showed Chinese retail sales plunged by 20.5% year-over-year in January and February, according to the National Bureau of Statistics.

Stepping back, while it’s critical to remember that “this too shall pass,” it’s disconcerting nonetheless. So, today, let’s turn to our analysts for perspective on this historic time.

***A recession is likely coming, but great stocks tend to bounce back quickly

 

Let’s begin with famed investor, Louis Navellier, editor of Growth Investor. This morning, Louis held a podcast for subscribers to discuss the volatility.

We’re going to lock limit down, then we’re going to re-test the Thursday lows, then we’re going to bounce, and then we’ll see what happens …

Louis then notes how Las Vegas is shut down, restaurants are closed in New York, Illinois, and Ohio. Miami and DC are ghost towns. The question he’s wondering is whether this will be a four, or six-week isolation … or more. We simply don’t know.

Now, for the big question — what will be the impact of the coronavirus on the U.S. economy? Back to Louis:

As far as whether this is tipping the U.S. economy into recession, I’d say almost certainly. You just have too many businesses and towns shutting down.

In a note of positivity, Louis notes how, as the weather gets hot, the virus should naturally die. As to a positive for the market, Louis tells us that the dividend yield in the Dow is pushing 4% — what he calls “ridiculous.”

Louis ends on a positive note:

Good stocks do bounce right back. The market does have a lot more yield than Treasuries … And of course, the home-building market will boom as people resume buying homes.

So, there’s a lot of things to look forward to as consumers might have more money in their pocket from lower gas prices and lower interest rates … Hang in there, folks. The re-test today is very healthy. Hopefully in four-to-six weeks everything is back to normal.

 

***The Fed’s actions will reduce credit risk but there’s no assurance the money will reach small businesses

 

Let’s now turn to John Jagerson and Wade Hansen of Strategic Trader.

John and Wade start by referencing the Fed’s capital injection into the banking system before adding their own commentary:

… this action should reduce the risk of a credit crisis, which is when banks can’t borrow or lend to each other and large institutions …

However, while the Fed can loosen monetary conditions, a rate cut doesn’t necessarily mean any of that money will reach small businesses and consumers in the form of loans.

In fact, the banking system in the U.S. essentially held the money the Fed injected during the financial crisis as “excess reserves” for years. So, while these monetary actions can prevent an emergency in the banking system, they don’t necessarily help consumers and small businesses.

John and Wade write that fiscal stimulus from the government in the form of transfer payments, assistance, medical care and unemployment benefits seems to be what investors want to see.

As to next steps, John and Wade are cautiously optimistic:

While this market disruption is stressful, it can also create some ways to profit.

We don’t recommend taking any action today while we wait for investors to digest the Fed’s actions and any subsequent announcements from Washington, but there should be some opportunities for us in the near future.

***Expect at least four more weeks until things even begin to return to normalcy

 

That’s from Neil George, master income-investor and editor of Profitable Investing. From Neil’s update today:

As I wrote in the Friday update, China went through roughly two months from the major economic and market fallout through to getting back to work and having their markets begin to reflect the recovery.

The U.S. is a whole lot more decentralized than China so the process of getting past the business and consumer impacts from the virus is at least going to take as long and may well last longer. To me this means getting back to work on a more normal basis will take at least four more weeks.

As to your portfolio, Neil makes a great point — in the absence of accurate earnings information to help us value our stocks, we can look at underlying asset values and net book values.

And so, the key argument to make when making the call to continue to own each stock in your portfolio as well as in the model portfolios is what the underlying companies’ book value really is relative to stock prices.

Then critically, the ability of each company to service debts from bank loans to private loans to bonds. This is why I always look at the credit of each company behind their stock and why I continually note their debts and their cash and other assets in terms of their ability to sustain themselves.

Neil ends on a positive note …

… as companies begin to make announcements of re-opening — that will be swiftly reflected in stock prices in general.

Meanwhile, the bigger dividend U.S.-centric companies with ample assets and debt service ability will continue to hold their values better.

 

***Most likely, we haven’t seen the lows … but Eric Fry is still buying

 

That’s the view of global macro specialist and editor of Fry’s Investment Report, Eric Fry. But Eric notes this will create opportunities.

From Eric:

Most likely, the major averages have not yet reached their bear market lows. Based on probabilities, the stock market averages will drift even lower than they are today and will reach their ultimate lows a few weeks or months from now.

That said, the stock market is not one big monolithic creature; it is a market of stocks. Even if the S&P 500 Index does not bottom out immediately, many individual stocks will.

“Best-of-breed” stocks, in particular, tend to bottom out first, and then move higher while the rest of the market is languishing. And since we investors rarely get the opportunity to buy best-of-breed stocks on the cheap, we should be looking for the opportunity to do that … starting right now.

Given this, Eric is actually recommending four new “buys” today in his Speculator portfolio. Given Eric’s multi-decade long career, it’s encouraging to see this veteran being willing to put money to work today.

Eric also ends on a positive note:

I believe today’s market is providing a great buying opportunity, in the context of a 12- to 24-month investment window. In other words, I believe most stocks will be much higher within 12 to 24 months, even if they move lower first.

***Finally, please join Matt McCall tomorrow night for a live briefing on the market and what to do with your money right now

 

I spoke with Matt McCall, editor of Investment Opportunities just minutes ago. While he recognized the severity of the situation, he also saw the unprecedented opportunity.

Jeff, I felt nervous this morning. I believed investors would see the Fed’s decision, be spooked by it, and continue the panicked selling, and that’s what happened.

I believe the Fed’s decision was early. They should have waiting until their scheduled meeting on the 18th. Their decision was an overreaction which caused today’s market panic.

As to what to expect looking forward, I believe we will see a countrywide shutdown. But I’m also confident we’ll come through this quicker than most people imagine. And when we do, it could be one the greatest buying opportunities of the generation.

In fact, if we look at investing from a decades-long perspective, I believe we will look back at this crisis as probably the greatest investment opportunity of our lifetime.

That’s a welcomed, hopeful perspective in this time of uncertainty.

For more from Matt, please join us tomorrow night, March 17, at 7 PM EST for a live briefing. Matt will be going unscripted, talking about the market and how investors should be viewing this historic volatility.

To reserve your seat, just click here.

We’ll continue to keep you updated here in the Digest. In the meantime, please stay safe.

Have a good evening,

Jeff Remsburg