Stocks climb, inflation heats up as pandemic diminishes
With the pandemic waning and the economy revving up, stocks continued to set new highs in the 2nd quarter.
By Mark Simenstad, Chief Investment Strategist | 03/09/2020
After an historically volatile week in the financial markets, global markets have opened the week in a steep drop. European stock markets were down more than 7%, while Asian markets dropped 3 to 5%.
In the U.S., an early drop in stock prices triggered market mandated “circuit breakers.” These trading rules are put into effect to blunt the effect of a cascade of falling prices that can feed on itself in illiquid and disorderly markets. The first level is a halt of trading when the market is down 7%, followed by a 15-minute “cooling off” period before trading resumes. We saw that in the market this morning. Another circuit breaker would take effect if stocks reach a 13% downside limit on the day.
In short, the market is now paying attention to epidemiologists and public health experts who are gaining a much better grasp on the rapid spread of the COVID-19 epidemic rather than to central bankers or politicians.
In the past week, the statistical models that public health experts used to forecast the exponential growth of viral outbreaks appear to be coming to fruition. The number of countries reporting infections is rapidly increasing, while the total number of worldwide cases is multiplying at exponential rates.
Italy has now taken the extreme step of quarantining entire areas in the northern part of the country. In the U.S., Seattle has become a so-called “hot spot” of infection and is beginning to take steps to try to suppress further transmission. In short, this is now clearly not a short-term health crisis but is one that needs a rapid and coordinated response.
Currently, it is impossible to understand the full impact of the COVID-19 outbreak both from a public health perspective and an economic perspective. However, clearly the environment is profoundly changed from just a month ago. Here are a few things to consider:
When this crisis winds down—and they always have—it will be important to consider the basic market fundamentals of long-term earnings prospects, inflation, interest rates, debt and liquidity. Earnings will be very difficult to gauge for a few quarters, if not the balance of 2020, and corporate debt levels are relatively high.
These factors will be serious headwinds to a swift recovery in market prices. However, a strong and longlasting countervailing tailwind may come from exceptionally low inflation and bond yields, coupled with central bank policies that are likely to pump up liquidity to help stabilize the capital markets.
In summary, this situation is likely to persist for an undetermined period. Investors need to be prepared for this and stick to their long-term plan. Two old adages come to mind here: “the horse is out of the barn already” and “this too shall pass.”
All information and representations herein are as of 03/09/2020, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
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