I finished yesterday’s Rum Rebellion with the question, will the power of a promised liquidity injection overcome the fear of a global economic slowdown?
The early answer to that question is no.
The US Federal Reserve cut rates overnight by 50 basis points. At the close, the Dow Jones, S&P 500 and NASDAQ were all down around 3%.
The US 10-year bond yield dropped below 1% to another record low. In other words, bond prices are at all-time highs.
Gold followed bond prices higher and surged nearly US$50 to $US1,650 an ounce on the Fed’s surprise move, before pulling back a bit.
Likewise, gold stocks ripped higher initially, before settling back.
A panicked and nervous market
Clearly, this is a panicked and nervous market. The fact that stocks sold off while bonds and gold moved higher suggests capital is in preservation mode right now.
That’s due to the uncertainty over the spread and severity of the coronavirus. What impact will it have on global economic growth? What impact will that have on company earnings?
Going into 2020, Wall Street expected an earnings rebound. Those expectations are unwinding as I type. When a market is priced for growth, and that growth doesn’t eventuate, bad things usually happen.
The Fed cutting sharply today added to the panic, rather than soothed it. The additional liquidity it created went straight into defensive assets, amplifying the already pervasive fear sweeping through markets.
Likewise, the RBA’s 25 basis point cut yesterday fell flat. While the market finished higher on the day, stocks sold off on the news. In this market, the prospect of a monetary hit is greater than the reality.
Such is the power of sentiment. When fear is prevalent, there is not much you can do.
What is so unique about the current situation is that little more than a week ago it was exactly the opposite. The market was irrationally bullish. There were signs of a peak everywhere.
As I wrote to subscribers of Crisis & Opportunity:
‘The euphoric phase is the most emotional. Events take place that could only happen during this stage.
‘For example, the Financial Review recently published an article about an Instagram model pushing share tips through Twitter.
‘The same paper also published an article on a 31-year-old fund manager who says he’s a value manager, but ‘not in the conventional sense’:
‘“What I’m trying to do is find those pockets of value you can’t see. You’re not going to get that from typical financial analysis. You can do the traditional analysis, but it’s not really going to drive returns.”
‘Classic peak market financial journalism…
‘Then, there’s the new ASX listed tech index. The S&P/ASX All Technology Index [ASX:XTX] launched on Friday, 21 February. I tweeted this chart of the NASDAQ that morning, simply saying, ‘no comment required.’
And here we are, little more than a week later and greed has given way to fear.
But let’s take away the fear and the greed and just look at the facts. The leader of this bull market, the NASDAQ, is still well above the peaks from 2018 and 2019.
You can see this in the chart below. The broader upward trend is still intact. I have marked today’s trade with the green arrow. It may crack lower in the weeks ahead. Or it may consolidate for a few months.
No one knows. But I do know this is saying not to panic out of your positions yet.
And while the ASX 200 (chart below) is in worse shape, support at the 2018 peak is holding for now. This is worth keeping a close eye on…
But there is a more important thing going on here than distilling the mood of the market from the charts.
What this episode has shown is our willingness — and desperation — to look to governments and central banks to ‘do something’. As a society, we have lost the ability to withstand shocks and fend for ourselves. We are unwittingly giving up our freedom by handing more and more power to the state.
Alexis de Tocqueville had all this worked out in the 1830s after an extensive tour of the US. He came away with a dark view of democracy. He believed that people would use it to advance their own self-interests via the state. But because everyone had a hand in electing the state, they would not notice the controls being imposed.
‘I am trying to imagine under what novel features despotism may appear in the world. In the first place, I see an innumerable multitude of men, alike and equal, constantly circling around in pursuit of the petty and banal pleasures with which they glut their souls. Each one of them, withdrawn into himself, is almost unaware of the fate of the rest…
‘Over this kind of men stands an immense, protective power which is alone responsible for securing their enjoyment and watching over their fate. That power is absolute, thoughtful of detail, orderly, provident, and gentle. It would resemble parental authority if, fatherlike, it tried to prepare charges for a man’s life, but on the contrary, it only tries to keep them in perpetual childhood. It likes to see the citizens enjoy themselves, provided that they think of nothing but enjoyment. It gladly works for their happiness but wants to be sole agent and judge of it. It provides for their security, foresees and supplies their necessities, facilitates their pleasure, manages their principal concerns, directs their industry, makes rules for their testaments, and divides their inheritances. Why should it not entirely relieve them from the trouble of thinking and all the cares of living?
‘Thus it daily makes the exercise of free choice less useful and rarer, restricts the activity of free will within a narrower compass, and little by little robs each citizen of the proper use of his own faculties. Equality has prepared men for all this, predisposing them to endure it and often even regard it as beneficial.
‘Having thus taken each citizen in turn in its powerful grasp and shaped him to its will, government then extends its embrace to include the whole of society. It covers the whole of social life with a network of petty complicated rules that are both minute and uniform, through which even men of the greatest originality and the most vigorous temperament cannot force their heads above the crowd. It does not break men’s will, but softens, bends, and guides it; it seldom enjoins, but often inhibits, action; it does not destroy anything, but prevents much being born; it is not at all tyrannical, but it hinders, restrains, enervates, stifles, and stultifies so much that in the end each nation is no more than a flock of timid and hardworking animals with the government as its shepherd.’
Was he wrong?