The stock market has now priced in something along the lines of the following:
- Coronavirus will grip the country, and the world, for months to come.
- A full-fledged recession will occur in the United States this year.
- The oil industry will see major bankruptcies in the wake of oil going to $20 a barrel.
- There will be no response by the Federal Reserve or Congress that addresses the pandemic.
In other words, the current price of stocks assumes all the items listed above become a reality. Not that there is a risk of them occurring. Rather, that they will occur.
What makes sense to us is that the Coronavirus will grip the country for months to come even after cases peak. We have written that a recession is likely in the next twelve months so seeing one occur sooner as a result of Coronavirus is not surprising. It is likely we will see weak oil companies tied to the fracking industry seek bankruptcy.
However, no response from Washington is a bit too much to expect. Despite the obvious rift between the Congress and the White House, we expect a joint effort to take shape very soon. It will be this response, barring a sharp downturn in Coronavirus cases, that has the biggest effect on markets.
As we have written, this is a health crisis that has morphed into a financial crisis. The health crisis will undoubtedly be remedied before deaths reach levels like we see with influenza. A vaccine will be developed by the medical industry. The only question that remains unanswered regarding the vaccine is, “When?”
So, with stocks having priced in virtually everything listed above, the one item that can, and likely will, change direction is the government’s response. Maybe this is a bit of a cynical view of the government, but rarely has it ever made a perfect response to a crisis. Yet, they do eventually move toward a constructive, if not good, response. The Financial Crisis is a good example of a major crisis that took a few attempts by the government before the crisis was addressed. Coronavirus will unlikely be any different.
Expect a major move by Congress and the White House to address markets. It will not deliver a vaccine for the virus, but it will deliver a “vaccine” for the economy. When this happens, expect stocks to rip higher. Maybe not in a straight line and never look back. But, do expect a significant rally to put the financial part of this crisis in the rear-view mirror.
This is the time to remain patient as the market digests the shock of the Coronavirus and before a concerted response by the government is implemented. The market “knows” that more cases will be reported. It knows the “peak” has not yet been reached. However, the underlying economy remains strong and, despite major disruptions to travel and public gathering places, a return to normalcy will begin to take shape soon.
Kessler Investment Group, LLC