Following a breakdown in negotiations among OPEC+ members, Saudi Arabia took the dramatic step of cutting prices by around $6 a barrel. This move has sent global oil prices down by 31%. The largest move since the 1990 Gulf War.
In response to this move in oil, S&P500 futures are trading down approximately 4%. Much can happen between 9:30pm and 9:30am when stocks open for trading. But it is likely we will see a sharp drop in prices when stocks open for trading.
This is not too surprising for us. Recall in our last commentary we reminded readers that stocks do not typically bottom on Fridays. This axiom continues to prove true. Another axiom will likely prove its worth soon. That is, “Don’t fight the Fed.”
The Fed cut rates 50bps (one half of a percent) in the last week. Following this cut we suggested they were not done with their effort to stimulate the economy. We maintain this view and would not be surprised to see the Fed take further action this week. Additionally, we would not be surprised to start hearing about fiscal stimulus packages being put together by the White House and Congress.
What we believe is most important for investors to keep in mind is how transitory this exogenous force on the economy will prove to be. The virus is spreading but is not going to survive much longer simply because of the change in weather, if not due to the change in behavior from the global community. Further, while the virus is spreading, it is not leading to death rates which have characterized any number of human events. Events such as war, other viruses, chronic illnesses, poverty, etc. Yet, the world is reacting to this virus as though a significant percentage of the world population is at risk of death.
Make no mistake. The Corona Virus is serious business and can lead to death, especially among the elderly and those with underlying health issues. But it is unlikely to remain a pandemic for years to come.
So, what will the post-virus world look like? This is an important question for investors to ponder. Since this is the first pandemic to see such a dramatic response from the global community, we expect governments and consumers alike to adjust their behavior. It is likely that future pandemic threats will be handled more effectively. It will likely lead to greater coordination among all countries. Simply put, it means human behavior will likely change in a way that makes it harder for future pandemics to spread in the same way as Corona Virus. This would be a positive for economic growth in the future.
For now, we must wait for the pandemic to slow. We must also wait to see how governments and central banks will react. It is the response from governments and central banks about which we have more confidence. It is unlikely that these institutions are going to sit idle as markets melt down. While these actions will not have a direct effect on the virus, they will have a direct effect on consumers and investors. When the virus has passed, the effects of government stimulus will remain.
We believe when it becomes evident that the virus has been “contained” and government stimulus has been injected into the economy, stocks are going to move substantially higher from where they are today. Consumer behavior, while it will be more regimented toward cleanliness, will return to a close resemblance of normal. The economic effects of the virus will fade quickly from recessionary to limited.
The financial system, as a result of responses to the Great Recession of 2008, is strong. Bank reserves are significant and prevent the economic slowdown from spilling into another banking crisis. The financial health of consumers is better than it was in 2007 before the Great Recession took root.
Remain patient as this storm passes. It will pass. The economy will strengthen from the effects of the virus. Stock markets will reflect an improvement in the economy as the virus runs its course.
Kessler Investment Group, LLC