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Weekly Market Update for March 6, 2020

by JM Hanley

After the biggest decline in more than a decade in the prior week, the market swung back and forth and ended relatively unchanged this week. Investors weighed fears about a worldwide spread of the coronavirus against an otherwise favorable backdrop. Wall Street is watching day-to-day developments like the rest of the public. In the US, test kits to quickly diagnose new cases appear to have been in short supply, which has raised fears that the highly contagious disease could have spread. The effect on the US economy thus far is noticeable, if muted. Hotel bookings and box office receipts, among other items, seem to have ticked downward slightly. Air traffic is off more sharply.

Updates from China, which has been hardest hit by the outbreak, present a mixed picture – and a possible harbinger of developments in the rest of the world. The number of new cases of the virus has dropped dramatically over the last week and a half. While official economic data won’t come until March 16, “high-frequency” indicators of economic activity provide some reasons for hope. Consumption of coal, used to generate electricity, is far below last year’s pace, but has begun to increase at an accelerating rate. Traffic congestion has also increased, albeit mostly on weekdays. Discretionary travel on weekends still seems sharply curtailed.

The Federal Reserve attempted to do its part for the economy with an interest-rate cut of half a percent. This marked the Fed’s first emergency rate cut since the financial crisis of 2008-2009. Markets expected a cut, but half a percent was higher than most predicted. Fixed-income securities outperformed accordingly. Attention now turns to the Fed’s meeting in two weeks, when the FOMC is expected to cut rates again. With the target interest rate now at just a percent, some think they could simply opt to cut to 0%. Much will depend on how far the virus spreads in the US.

If they cut rates to zero, Fed’s tools for further monetary stimulus would be limited. Fed members seem unenthusiastic about negative interest rates. They may resort to purchasing US Treasury bills, as they did as the economy recovered from the last recession. This would inject cash into the economy, but many think stability rather than cash to be what is needed.

News beyond the coronavirus was mostly positive. Joe Biden’s success on Super Tuesday makes him the front-runner for the Democratic nomination; health insurance stocks rallied in relief. The economy added significantly more jobs than expected last month, although (as ever) wage growth was sluggish. Energy was a rare weak spot. Members of OPEC and Russia failed to agree on cuts to production in the face of lower demand precipitated by the outbreak. The price of oil fell 9% as a result. Bank stocks were also weak as the prospect for earning meaningful returns on cash deposits evaporated with the fall in interest rates.

Expect next week to be dominated by coronavirus headlines. An interesting and overlooked fact is that this year 18,000 people in the US have died of the flu and only 15 from the coronavirus. The best estimates put the mortality rate near one percent. That is somewhat higher than the flu but a fraction of (admittedly less contagious) recent outbreaks like SARS and MERS.

*The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Clients or prospective clients should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.