Next Moves in a Manic Market

到目前为止,今年3月,美国. stock markets have been, not just volatile, but characterized by big up days and large down days. Uncertainty around the extent and duration of the coronavirus outbreak, combined with the late-stage business cycle and election-year unpredictability, also help explain the manic market behavior.

我希望这个短期波动性继续urge investors to remain patient. While I don’t have a crystal ball, these large day-to-day swings reflect potentially extreme scenarios, in both directions, for the economy and for markets.

Recession odds havematerially increased. Initially, with news of the outbreak in China, investors worried about potential supply disruption. Now, the concern lies with a shock to both supplyanddemand. The full extent of lost activity is unknowable at this point. The longer consumers and corporate executives remain uncertain about the risks they face, the more likely they will curtail spending, creating a major headwind for economic growth.

The Treasury market reflects that downside view with the 10-year yield falling to all-time lows. The Federal Reserve’ssurprise half-percentage-point interest rate cuton March 3^rdcontributed to the reaction, as has the recent plunge in oil prices. Morgan Stanley economists now forecast several rate cuts in the next few months. Stocks could face more downside. However, if the dollar weakens against other major global currencies, that could make U.S. exports more affordable globally and offset some of the drag of slower growth.

Alternatively, the expected growth slowdown may not last into the second half of the year and global growth could recover. Disrupted supply chains would resume quickly if demand picks up. There are some positive signs: new coronavirus cases in China appear to be declining and global health organizations are working together better.

When nerves calm and business activities resume, pent-up demand could fuel economic growth. In this scenario, the housing and construction markets, lifted by low interest rates, could provide a catalyst for more spending. Stocks could rebound, but Treasuries would likely sell off.

Until some of the uncertainties lift, valuing stocks remains a challenge and “patience, but preparedness” remains my advice for any investor with more than a six-month investment horizon (less than that, reducing your allocation to global equities may make sense).

Pay attention to consumer and CEO confidence, the strength of the dollar and reported load of new coronavirus infections. A dip in that number globally may start to lift uncertainty and jumpstart global demand. At that point, investors should consider moving out of bonds and into U.S. and emerging-market stocks.