Thoughts On the Corona Virus and Market Reactions – Speed is Our Friend

This day is usually reserved for our end of the month video, or an easy Friday slide into the weekend post, however, we wanted to give you our thoughts and explanations regarding the Virus and Market Reactions.

Speed is Your Friend

Generally, recessions and deep Ugly Bear Markets, take time to occur…. the Wall Street name is “Rolling Tops” and long deep declines.  Fast forward to current conditions …. Think of 1987, 2011, 2016, 2018 and now today… these are quick drops … almost protests, by market participants, with much faster than normal recoveries…. We are certainly not guaranteeing this will occur again, but of the three most recent, the faster they fall, the faster they recover… The recent moves are over 4, yes FOUR days… (More to come in this repeated quick drops in the future!)

2-27-20 S&P 500

The Weatherman Affect

The CDC Center for Disease Control has been releasing information, especially serious information mid-week, that have directly and correctly affected the capital markets. The CDC needs to warn us for the worst possible scenario just like the weatherman needs to warn us for the tornado or hurricane, if not warned of the worst possible scenario, we may be in worse shape … and correctly complain of lack of information. This being said, some of the frightening statistics or actions that you may have crossed paths with, are likely not going to happen.

Capital Markets Finally Take Notice

Oddly from our perch, until this week, Capital Market (participants) basically ignored the Virus and the possible affects. This in part, may be why we are seeing such a big reaction (likely an over reaction) at this time!

Logically a virus that causes cities to shut down … no matter where they are, will lead to some type of economic slowdown.  Much to our surprise, capital markets, until recently had basically ignored this possibility. While we hate when capital markets go down, especially with such speed, there is a logical reason.

2-27-20 Index 5 days trailing

Due to the recent volatility, in groundhog like fashion we’re back where we started from and even a bit lower than the start of the year. Investors have acted rationally racing to the safety of bonds, pushing yields down, bond prices up as can be seen in the next graph. (Notice how the Yield spreads all collapse together recently, see next comments)

2-26-20 YTD Bond spreads

With spreads so close, and yields once again down (bond prices up- safety haven) it is not surprising, the inverted yield curve has once again raised its head.

2-26-20 Yield Curve 90 day 10 year 20 year chart

With market participants hating uncertainty,  until clarity is found concerning the spreading of this virus, we would expect capital markets to be very susceptible to headline stories, both positive and negative over reactions would not be surprising … Once again, another reason we like to have a conservative posture and will sit tight and be opportunistic as needed!

Hang tight, and pick your reading/viewing material carefully, it is very likely by the time it gets warm, much of this will be behind us, and a distant memory!

Enjoy your Friday and weekend…. sorry to be so heavy, but we wanted to share our candid thoughts!

Have a Great “Virus Updated” Friday!

John A. Kvale CFA, CFP

Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
Management firm.


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