Markets Wake Up to Reality: No Need to Panic

After not caring about rising infections across Europe and the US for weeks, the market suddenly cares very much.

Overnight, there was carnage as equity markets tanked around the world. Let’s have a quick look around the grounds…

  • S&P 500 down 3.12%
  • Dow Jones down 3.11%
  • NASDAQ down 3.30%

Gold fell 1.56% to US$1,877 per ounce. Gold equities fell much harder…

  • The HUI Index down 7%
  • GDXJ (gold juniors index) down 7.7%

West Texas Intermediate oil tanked 5.6%.

Over in Europe, Germany’s DAX Index sank 4.17%, while the UK FTSE dropped 2.55%.

As I said, cases of the ‘rona have been rising for some time. Have a look at the graph below:

Port Phillip Publishing


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But they have picked up lately. And because the fearmongering by a dying mainstream press has been so effective, politicians freak out with rising case numbers and impose harsh lockdowns.

Yet, as the following chart shows, the daily death rate has not increased with rising active cases:

Port Phillip Publishing


[Click to open in a new window]

It has started to pick up in the last few weeks, but it’s still below the peaks from April and July.

Regardless, as a result of the increase in cases, Europe is again imposing restrictions on movement and economic activity.

And of course, the stock market doesn’t like that.

Australia shouldn’t fare too badly given we’re cut off from the world. We’re not letting anyone in or out. ASX 200 futures point to a 1.7% fall today.

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The bigger concern for the market…

The other major and perhaps bigger concern for the market is the lack of more stimulus coming anytime soon.

If you take the stock market at face value, you may think that an economic recovery is well underway. But you’d be wrong. The stock market is (or was) too juiced up on liquidity to give any decent guidance about the underlying economy.

You have to look to the bond market for that.

And for all the talk about recovery, coming inflation etc, bond yields rose by a paltry 30 or so basis points. They’re still only 0.77%!

In other words, the bond market never really bought the recovery talk. It correctly realised that all the stimulus thrown at the US (and global) economy these past six months merely attempted to fill a massive economic hole dug by politicians’ panicked response to the virus.

But the hole is still there, which is why the market desperately wants another hit of stimulus. But it was always a long shot before the election. Here’s what I wrote back on 9 October:

Ahhh…stimulus. Where would we be without it?

This comes hot on the heels of confirmation that the US government fiscal deficit for the year to 30 September was a massive US$3.1 trillion.

The market already knew that. And it knows that it has already washed through the system. Which is why it’s desperate for more.

Whether that happens before the election though is another matter. The Democrats won’t want to give Trump a win by agreeing to limited measures. And Trump doesn’t want an off the charts spending package as proposed by the Democrats.

Still, the market is in the mood to wish for impossible things.

Not anymore, it seems.

The market is in the mood to face facts. And it’s not pleasant.

I don’t know any better than the next person how all this will play out. But here’s how I’m thinking about it.

Bond yields will continue to fall

The global economy is in a debt trap. Governments and central banks will meet every major plunge in stock markets with new announcements of more spending and more ‘money printing’ (which is really just asset shuffling, but don’t tell the stock market).

This will only reinforce the structural problems in the economy. Which is why bond yields will keep falling, and possibly move into negative territory next year.

As long as enough fiscal stimulus keeps the economy afloat, stocks should do OK.

But here I’m talking about plain old boring stocks that are good value and don’t do anything exciting. I would steer well clear of the high-flying tech stocks. They’ve had their virus-assisted run. The world will slowly get back to some sort of normal next year, and the enthusiasm for tech will run out.

So don’t panic too much about this recent bout of volatility. I’ll be using the sell-off to evaluate solid, boring companies with a viable business model that produce plenty of cash.

The RBA is about to go to zero and start its own ridiculous program of quantitative easing (and thus confirming the Aussie economy’s path into the same hole as other developed nations). Government bond yields are below 1%.

You simply must be in the stock market for a chance at generating decent long-term returns.

But it won’t be easy.

More on this tomorrow…


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Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

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