Flights being slashed, events canceled, businesses quarantined, and the government’s trying to come up with measures to stop the slowing of the economy (like a potential stimulus and Fed rate cuts).
But let’s look back… this damage began during the trade war.
The Fed began slashing rates during the trade war, and ongoing back and forth issues with China contributed to market volatility, potential supply chain disruptions, and the glaring reality of our dependence on China.
There was so much talk of how much damage the trade war would do, and it did have the potential to be severely damaging due to the supply chain impact and impact on consumer spending — but, the difference here is…
The trade war was ultimately resolved before it caused severe damage. It didn’t have a huge impact on consumer spending. And now, we have the threat of the coronavirus, which is a very real stock market and economic threat, and the Fed has already used tools arguably a little early that they really need now.
The coronavirus may be what delivers the final blow to the 11 year bull market, and here’s why.
The problem here is that rates are already incredibly low, and there isn’t much lower they can go. This gives the Federal Reserve little room to come to our rescue. Rate cuts are supposed to stimulate spending, but when people aren’t leaving their houses in major cities across the US, there’s only so much this type of action can help. Additionally, even upon the Fed emergency cut last week, the market reacted with vigor, but, it was to the downside! Historically, Fed rate cuts have been bullish for the economy — not so, in this instance.
That was a very key signal to me that even the Fed can’t save us now.
This was a key issue that I brought up during trade war volatility — if the Fed cut too much at that time, they wouldn’t have as much power to react later down the line, if something else happened.
Additionally, the main issue here is a lack of consumer spending, which is impacting a wide variety of industry groups, including retail, travel, energy, etc. This is a shock that’s hitting a variety of industries, in a big way, at the same time. It’s an unknown, something that the Fed isn’t used to combating with additional monetary adjustments. Nobody knows if — or when, consumer spending will come back on airliners or cruises, or, how much worse it’ll get in the US.
Well, here’s something else. So, what about a tax stimulus?
I mean, President Trump is taking reasonable action, but the stock market is facing a steep decline upon coronavirus and the Dow entered bear market territory recently.
Do I think the government can use stimulus to fight our way out of this economic shock?
No. Here’s why.
Watch Danielle discuss the impact of the coronavirus on the economy above, on TDAmeritrade Network, live from the Nasdaq in New York City.
The video above provides the background, but here’s the main issue…
During the trade war, the major caveat was that consumer sentiment and spending was still strong. Consumer spending makes up a very important part of the economy, and with coronavirus self-imposed/business imposed/city-wide imposed moves, this is proving to be a drastic shock to consumer spending. China has been dealing with this for 8 weeks. We’re just seeing the impact in Seattle, as major universities have cancelled classes and major companies are all telling employees to work from home. While big tech can do this, and employees in companies like Amazon and Microsoft can probably survive, what about the money they aren’t spending to put gas in their car, the lunch they bought every day, the shopping they would do, or the cocktails after work?
This is an enormous economic impact that’s only just beginning in the United States.
At this point, it’s pretty clear that containment of the virus isn’t entirely possible, and the impact of the actual virus itself is up for discussion. The number one risk to the US economy and stock market at this point is the fact that conferences, companies, schools are literally closing their doors and this’ll provide a shock impact to the economy as consumer spending halts, businesses lose money (we’re already seeing this with United Airlines that came out and said that they’re slashing flights and want employees to offer to take leaves of absence). As the stock market falls, this additionally hits consumers and companies making them less likely to spend money and invest in new projects.
The most dangerous part I believe is the fact that we went into this with the highest debt levels in history — and with this shock to the economy, it’ll only be so long before people can’t make debt repayments, and that’s how it could really get nasty.
IF companies continue to cancel conferences and events, employees are told to stop travelling, and people still don’t want to leave their homes — this is going to be the blow that reverberates throughout the stock market (and corporate earnings!) and the economy.
So, what do we do?
If and until the coronavirus fear comes to a stop — and people feel comfortable flying, conferences are back on, and gatherings aren’t a scary situation, we can expect consumer spending to take a hit, and therefore corporate earnings and lower prices in equities.
Earnings season is upcoming, and while I normally look for a run into earnings, I’m absolutely not looking for that this quarter. In fact, earnings could be a substantially worse blow to the stock market, in the near term, that what we’ve already seen. This is where we’ll see the true impact of the coronavirus.
At this time, we just don’t know how bad it’s going to be. It could be not so bad, or, it could be terrible. There are a lot of unknowns.
So, how am I trading it?
Currently, I’m focusing on short-term timeframe trades, focusing on trading the indexes, both in the options and futures market. The futures market is particularly beneficial for these moves, because they happen so quickly. Almost every night, we see a major gap up, or down, in the indexes that provides opportunity in the futures market.