Five Positives Among the Carnage

by Greg Valliere, AGF Management Ltd.

A CONTRARIAN VIEW: Obviously this has been a horrible selloff, and obviously there’s weeks to go before the coronavirus peaks. But there are some reasons for cautious optimism — we list five below:

1. The Fed has to move: As we wrote yesterday, a rate cut is likely by early spring, with another by early summer. That won’t kill the virus, of course, but it might stop the stock market carnage, sending a reassuring signal that the Fed is determined to avoid a recession. Even if the Fed doesn’t act, the bond market has done the heavy lifting; astonishingly low interest rates should prompt still another round of refinancing — and could lead to a second-half economic snap-back.

2. A very bullish political scenario: The stock market is within days of its dream scenario — the likelihood that after Super Tuesday, socialist Bernie Sanders will be the clear front-runner to win the Democrats’ nomination. This not only would make Donald Trump the overwhelming favorite to win re-election, but raises the likelihood that the Senate will become even more Republican, with a chance that the liberal House could flip back to the GOP, a very bullish scenario for the markets.

3. Tell the truth: What an embarrassment for the governments in Beijing and Tehran, which have lied and hidden information about the disease. The people in those countries aren’t stupid — they know the coronavirus is worse than their governments have asserted. This is still another reason why people living in totalitarian dictatorships will continue to agitate for transparency, and why global investors may increasingly ask whether they can trust China.

4. Wartime footing: Every firm that manufactures medication, masks, protective suits, etc., is working 24-7; Reuters reports this morning that the Trump Administration is about to ramp up the Defense Production Act. Will it really take a year and a half to get a vaccine to the public? From Israel to Sillicon Valley, the rush is on the get a cure. Just as the overall economy benefited from inventions that stopped Hitler, the economy will benefit from medical breakthroughs that will kill the virus.

5. A sell-off was long-overdue: The market obviously was getting frothy in recent weeks, and the “fear and greed” scenario eventually had to come into play. For the first time in this selloff, we sensed a whiff of fear yesterday afternoon, which could carry over to this morning. When there’s a pervasive sense of fear and pain, the selloff will subside, that’s just basic Wall Street 101, as Sir John Templeton preached — euphoria leads to selloffs, gloom leads to recoveries.

BOTTOM LINE: This virus could panic the world for weeks to come, despite its relatively low fatality rate. Eventually a more positive narrative will emerge, and the five points we listed above (and many more) eventually will lift the gloom. It’s always darkest before the dawn.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

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This post was first published at the AGF Perspectives Blog.