The Federal Reserve’s and the government’s massive and quick actions should stabilize what has been an economy in freefall, but we won’t escape a recession.
Whether we get to enjoy a rally, or even stabilization, the cure to the coronavirus - absent a vaccine - appears to be global governments pushing their respective economies into recession.
We humans like a narrative, a story we can relate to, because it helps us make sense of things, and that makes us feel more comfortable. The fact that the stock market was up about 19% over the previous four months, based on very little improving fundamentals, set us up for a tumble.
My concern is that the Fed will begin to gain comfort in the functioning of short-term interest rates, then decide to reduce the balance sheet just before a shock coincides with less liquidity and super-high stock valuations.
The U.S. produces about 13 million barrels per day and consumes 21 million, so higher oil prices could depress economic growth. But I’m not worried about that yet.
The market is going to move slower or faster toward fair value for a whole host of reasons, and to think it’ll get there on some exact day is just dumb.
Overconfidence leads investors to believe that they will be one of the few who succeed. It turns out that people who trade the most, presumably due to misplaced confidence, produce the lowest returns.
Our shift from growth to value throughout last year has been small in magnitude and snail-slow. We didn’t want to get too defensive and lose out on the upside, and value stocks allow for the possibility of participating on the upside.
Some Fed officials want another cut this year, and others could be convinced to do so if the economic data weakens. The Fed has continued to repeat the line that any decision made — cut, stay or hike — will be “data dependent.”
When it comes to the movement of stock prices and how those prices reflect fundamental data, good vs. bad is largely irrelevant. What matters is not good vs. bad, but better vs. worse.
The chairman appeared to be sending a message to the White House that its trade war is pushing the U.S. toward a recession, and that the Fed may not have the tools to bail us out if that happens.
