This week's Alpha Trader podcast features hosts Aaron Task and Stephen Alpher talking about the market fallout from the coronavirus with LPL Financial's Ryan Detrick and the economic fallout with RSM's Joe Brusuelas.
Editor's note: This podcast was recorded on Friday March 6th - prior to the weekend collapse in the oil price adding to the coronavirus panic.
Detrick has been prepping clients for a pullback for some time, and he notes the correction at the time of recording (just over 12%) was roughly inline with other annual peak-to-trough measures in recent years. What's unusual this time is the massive flight to safety as seen in the huge declines in Treasury yields.
Yes, says Detrick, there will be an economic slowdown coming up, but stocks and yields at the moment are pricing in something way more than that. What may put a stop to the selloff might not even have to be good economic news, but instead just less-weak-than-feared data.
Were you aware that stocks in China - ground-zero for the coronavirus - are at two-year highs? Whether or not one believes the government figures that the damage from the coronavirus has been contained, says Detrick, the financial flows don't lie - money is moving into Chinese shares.
Bottom line, says Detrick, the earnings yield on the S&P 500 is in the neighborhood of 5%, while the 10-year Treasury yield is below 1%. That's a spread of more than 400 basis points - one of the cheapest reads on that measure going back 70 years. Cheap can absolutely become cheaper, but Detrick and team are telling clients stocks will outperform bonds over the next 12 months.
It's a highly unusual three-way shock facing the U.S. economy, says Joe Brusuelas - that's a supply shock, a demand shock, and a market shock. Even with all that, he's not expecting a recession, but instead an H1 slowdown to less than 1% growth (mostly to be seen in Q2 data).
The Fed cut was necessary, says Brusuelas, even if it might be ineffective at addressing the causes of the recent troubles. The issue, he argues, is that nothing - for now - is moving on the fiscal side, and that's what's really going to be needed to combat this slowdown.
Going forward, these shocks are going to manifest themselves in bankruptcies and unemployment, particularly as it relates to small- and medium-sized enterprises. The president and Congress are going to need to work together and be creative. This president and this Congress? Yes, says Brusuelas, and if things get bad enough, the two branches will find common ground to get things through. Even something like the payroll tax break that's been bandied about is a great idea. Brusuelas reminds that this was a feature of the crisis response in the Obama administration, so there is some precedent.
Brusuelas looks at plenty of indicators, but if he had to pick just one it would be the 13-week moving average of initial jobless claims. When it moves above 242K, it's time to get worried. While only about 212K now, the layoffs at the West Coast ports have begun, says Brusuelas. He figures it'll take about 2-3 weeks before those begin to translate into the jobless claims numbers.
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