— COVID-2019 fears continue to dominate the market.
— It is very hard to square the terror that surfaced Friday in bonds and gold with the evidence at hand.
— Will coronavirus just be another obsession that falls by the wayside in the secular bull market?
The S&P 500 is just 1.7% from a new record high. Admittedly, this statistic makes it very difficult to connect to the emotion of terror but if you look just under the surface certain investors are flocking to ‘safe haven’ investments … U.S. Treasury securities and gold. Friday, (2/21/20) they ran very hard to these investments on fears of a coronavirus induced economic slowdown. Gold was up $25.00 closing at $1650.00 (a 7-year high) and the 30-year U.S. Treasury bond closed at a record low yield of 1.89%. These numbers, especially in the bond market, denote some sense of panic.
Note these headlines from CNBC:
I think you get the picture.
Interestingly, in the face of what looks to some like a global COVID-2019 economic swoon, Dr.Copper was up Friday and significantly higher than it began the month of February. “The term Doctor Copper is market lingo for the base metal that is reputed to have a Ph.D. in economics because of its ability to predict turning points in the global economy.”
It’s very tough to square the fear with stock prices
As I pointed out above we are less than two percent from the S&P 500 all-time high. In fact, the Shanghai market was up every day last week . Yet there is this flight to safety going on in our market.
As of today (Saturday 2/22) the New York Times reported “the virus had spread to 26 countries, and 1,200 cases had been confirmed outside China, including more than 200 new cases in South Korea, multiple infections in Italy and Iran, and one in Egypt, the first to be confirmed in Africa. China has reported over 76,000 cases, including over 2,300 deaths.”
One reason behind the mild resurgence in the Shanghai market might be that the trajectory of new cases in China appears to be flattening. According to Al Jazeera, “Mainland China noted a significant fall in the number of new cases, with 397 reported on Saturday.” Remember this on a base of over 76,000 since the beginning of the epidemic.
The media: a blessing and a curse
On the blessing side of the equation the media rapidly got the word out on the coronavirus outbreak in China and people around the world have acted to prevent its spread (76,000 plus cases in China 1200 outside of China). The curse is exemplified by the headlines above. They are scary, reported without perspective and meant to engage our instinct to focus on bad news.
We are afloat in a sea of Black Swans
We always are. They can become realities out of the blue. The financial crisis of 2008 was one such event. Only the most astute among us saw it coming. The rest of us, including yours truly, didn’t have a clue about what could have ended up being an economic disaster but that is past. Although many expend a great deal of effort trying to forecast the next disaster, there is no way to know where the next blow-up occurs.
What I do know is that many participants or non-participants in the market have been forecasting or looking for “the big one” since the 2009 bottom. Many, much to their chagrin, have met the advance in stock prices with great skepticism and low levels of participation, instead waiting out the uncertainty in the safety of the bond market.
How did that work out?
$10,000.00 invested in a guaranteed safe 10-year Treasury in March 2009 and reinvested in March 2019 would be worth today $10,000.00 plus $4276 in cumulative interest paid during 11 years. This example assumes the best … you got the high tick on yield (low tick on price) in March 2009 as well the high tick on yield on your 2019 buy. At the same time $10,000.00 invested in the S&P would be worth $50,000 today (S&P 666 to 3338). Yet, the extreme fear continues to exist. Investors continually run for cover (at the slightest ripple in their peace of mind), to the presumed safety of bonds, bonds paying historically low rates. I don’t get it. I believe when this caution is reversed the secular bull market will be over. We appear to be nowhere near this inflection point at present.
My advice is quit looking at the trauma in your rear-view mirror. Right now the economy is in good shape and the market is attractive in the context of 1.57% and 1.89% yields on the 10 and 30-year Treasuries respectively … S&P 500 current yield +1.81%. Unlike the US Treasuries, the S&P dividend has grown significantly over time. The treasury you buy today will never raise or decrease its issue coupon rate .
Reigns of Terror
There have been many reigns of terror since the bottom in 2009 and many prior to that time. Since I began to publish kortsessions.com in 2013, I have documented many of these unwarranted and harmful market obsessions. It seems to me, based on the information currently available, COVID-2019 will be another addition to the list.
What’s your opinion?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.