We’ve had the relief rally already. What’s next?

*I started this post about 8:30 EST. So, hindsight tells me the part on market tone is on the money, as the market is selling off a bit.

Market tone

So, I was right yesterday morning about the potential for a relief rally. It was a pretty big one too. But, I think it was so big that we really can’t expect a lot more near-term upside unless we see concrete outcomes from the meeting of G-7 finance ministers and central banks. Up until now, markets have been looking for any excuse to rally after being pummeled. But having seen a snapback, we will now need to see action, not just promises.

The original e-mail I sent yesterday had a typo, saying markets were pricing in about a 10% chance of 50 basis points from the Fed at the March meeting. It should have read 100%. And that means the Fed is on the hook now for at least 75 basis points of easing in 2020 to meet market expectations. The March meeting and communication ahead of it will be vital in setting the tone because I believe the news flow will be mostly negative – earnings warnings, economic growth assessment downgrades, and a mushrooming of coronavirus case counts.

The virus

We now have 5,000 cases in South Korea and 90,000 globally, with 3,000 deaths. What’s happened in South Korea is instructive because, as an OECD country, they have banned all large congregations after the massive collection of cases associated with the Shincheonji Church of Jesus made clear that large congregations presented a health risk. The mayor of Seoul has even sued the church, accusing it of ‘murder’ and ‘injury’ for its role in spreading the disease without providing information to authorities (link here).

This goes to what I was saying about Trump rallies and other election-related events in the US. They are a serious health risk in my view. And I believe that when the case counts rise in the US, people will view attending such events differently. Eventually, we are likely to see large events curtailed and cancelled in the US, just as they have been in South Korea, Japan and parts of Italy. We should also expect school closures, as we have seen in Italy.

My View

Some personal issues are taking me away. So I have to leave it extra short today. I think we get a U- or L-shaped recovery here, meaning it will take a while for things to recover a semblance of normalcy. We just don’t know how long at this juncture. Some demand has been destroyed and won’t be replaced. And monetary or fiscal stimulus isn’t going to change that.

I think monetary stimulus can ease financial conditions and work some magic through the mortgage channels. But, that’s about it. Lost demand means lost growth and earnings will reflect this.

Whether we get a recession remains to be seen. I think Japan, Italy, and Germany will almost certainly go down. Global growth will slow enough to call it a global recession. I am still waiting to see about the US.

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