The whole stock market should not be putting in new record highs under the circumstances

Outlook:

Yesterday was indeed church mouse quiet, and today doesn't offer much data to get the crowd out the door. We get the Empire State manufacturing index, the NAHB Housing Market Index and the Treasury report on capital flows late in the day. Some earnings from big companies are due, too.

That leaves consideration of the fallout from the China virus. Judging from the outlook for trade and the proper response of the stock market to affected companies, markets are doing it right, or as well as can be expected from any crowd. They are not overreacting in panic or blindly buying everything in sight, even if our judgment is that the whole stock market should not be putting in new record highs under the circumstances.

Denying that trade is going to fall off the cliff is silly. Bloomberg reports global trade "will likely stay weak in coming months as disruptions from coronavirus in China staunch the movement of international commerce already slowed by tariffs and uncertainty, according to the WTO. The Geneva-based body's latest forward-looking Goods Trade Barometer stood at 95.5, compared with a level of 96.6 in November. Readings of 100 indicate growth over the next quarter in line with medium-term trends, while those higher or lower than 100 point to growth above or below the recent trend."

And equity market players are not dopes. See the chart from the WSJ—companies with exposure to China are faltering while the overall market keeps rising. The China-related names in this index would include Apple but not the latest news. Next to that chart is another from Gittler at BDSwiss showing China-affected commodities are doing okay. The implication is that people on the ground in China may believe the epidemic was tamed and is nearly over. Ah, but implications and inferences are not facts.

Bloomberg opines that what is important now is to take focus off central banks, which cannot save or even ameliorate the fallout from an epidemic, and put it on the other institutions that are responsible for helping citizens in time of need—the hospitals, health organizations conducting research, et al.

"But even though governments can't spend their way out of a public health emergency, there are still lessons to be learned from the past. In an environment where people are prone to panic, the money being pumped into the economy is just one facet of the response. The other key thing, and we re-learned this in 2008 and 2009, is that government credibility is a valuable asset in its own right and essential when the public is overwhelmed with negative animal spirits. As such, part of the issue in containing the coronavirus is not whether the monetary firepower exists to fight the crisis, but whether public entities -- governments, the WHO, organizations like the CDC etc. -- have the credibility to do what is necessary to slow the outbreak."

This seems wise. At the same time, though, it is nearly inevitable that we will be getting a wave of new central bank easing, including (probably) in the US, even in the absence of the epidemic reaching American shores. Cheaper money is no solution if there is a shortage of goods, but never mind. It's what central banks do in the face of a slowdown in activity, whatever the underlying cause. The other outcome is that a crisis always presents an opportunity for some far-seeing and sometimes crackpot inventor or investor. For example, bee propolis is an ancient remedy for all kinds of maladies, including inflammation of the respiratory system. A new fad for propolis—and a substantial rise in price—might trigger a bigger, better effort to save the world's bees, an authentic crisis of long standing in its own right. Just one idea.

As noted above, the Apple news put everyone in a panic spiral, suggesting risk aversion is starting the day at its high and can fade away a bit by end of day. That doesn't mean it would be safe to buy euros or AUD, just that second thoughts might mitigate the trend somewhat.

US Politics: We don't know whether or when we will get information about the conference call between the Roger Stone judge and the defense about a new trial. It's extremely rare for a new trial to be granted and conditions in this case—political interference to favor a crony--probably raise the bar.

On the election front, tomorrow is yet another debate by Democratic party candidates ahead of the Nevada caucus (held this coming Saturday). For the first time, Bloomberg will be on the stage, having polled at 19%, second behind Bernie at 31% in an important, credible poll by NPR, PBS NewsHour and Marist. In Virginia, Mayor Mike and Bernie are tied at 22% each. This reflects the power of big advertising money. We agree with Bloomberg that he is the Dem who can actually beat Trump.

 

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