Peaked

Peaked.  Markets ended yesterday’s session mostly unchanged as investor interest in the Coronavirus, now officially named COVID-19, turned the corner.  Fed Head Jerome Powell told lawmakers that he is happy with current interest rate policy and that the Fed is monitoring the virus closely.

N O T E W O R T H Y

Interest in interest.  Stocks began yesterday’s session with sizable gains even as reports that Coronavirus deaths topped 1000, speeding past SARS deaths.  The current count, for those who like numbers is 45,168 infected and 1,115 deaths.  It appears, for now, that stock investors have moved on rather quickly from the outbreak.  This quick-bounce response to news borne shocks seems to be more and more normal as dip buying quickly overtakes fear selling.  What is the cause of this insatiable appetite for risk?  What ever happened to wait and see?  Well for one, the market is now full of short term traders looking to cash in on quick market moves.  They jump in on both sides, selling short when fear starts to emerge and buying once the fear is exhausting.  This should mean nothing to long term investors but it does accentuate the short term market moves causing them a bit of indigestion… if they are watching too closely. But what about longer term investors?  What is their logic? Well, let’s start out realizing that there is always money to invest… somewhere.  Let’s also assume that money will always find the investment with the greatest potential return.  At a high level, you can look at stock returns in two ways.  One way is to look at the dividend yield and the other is to look at earnings yield.  The S&P500 dividend yield is 1.79%, and the S&P500 earnings yield (which is the reciprocal of the P/E ratio) is currently at 4.49%.  Those numbers look juicy (not a technical financial term) compared to bonds where the 10-year is currently yielding around 1.6%.  Bond yields being so low (all around the world) is certainly a factor in the increased demand for stocks.  Stock holders can take a little solace in that fact. However, we should not ignore the cause for such low bond yields and, more importantly, the longer term implications of them. Yields are low because investors fear that there are economic risks on the horizon.  Interest rates are also impacted by dovish monetary policy, which is prominent all over the world, saving but a few very very risky countries.  I have written about the risks of such low Fed Funds rates so late in an economic cycle. If things get rough, the Fed has very little dry powder to act decisively.  Only 175 basis points between where we are today and 0%, to be exact.  It’s not just me that is a bit concerned, the Fed Chairman mentioned it in his testimony to Congress yesterday. He warned that the “low interest rate environment may limit the ability of central banks to reduce interest rates enough to support the economy during a downturn.”

THE MARKETS

Stocks were relatively flat yesterday for a second quiet session as investors shrugged off worries from the Coronavirus, focusing instead on earnings and the FTC, which announced that it was looking into past acquisitions made by Amazon, Apple, Facebook, Microsoft, and Google/Alphabet.  The S&P500 ticked up by +0.17%, the Dow Jones slipped marginally by -0.002%, the Russell 2000 traded up by +0.59%, and the NASDAQ composite rose by +0.11%, just enough for a new all-time high.

NXT UP

- Philadelphia Fed President Patrick Harker will speak today.

- Chairman Jerome Powell will testify before the Senate Banking Committee which will certainly impact markets in today’s session.

- This morning Bunge, CVS, and Molson Coors beat while Moody’s missed earnings expectations. After the bell, TripAdvisor, Applied Materials, MGM Resorts, Cisco, Equifax, and Annaly Capital Management will announce earnings.

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