Late on Monday, President Trump announced that he will be discussing a payroll tax cut, sick leave policy and other fiscal measures to deal with the economic impact of the coronavirus. Other governments around the world are taking policy steps as well. Italy, for example, is suspending payments on mortgages.
President Trump has a press conference scheduled after the close on Tuesday to announce the details, but the market is already relieved to see decisive action. In addition to the fiscal policy moves, it is widely anticipated that the Fed will further cut interest rates at its policy meeting on March 18.
The big question for market participants is whether these fiscal and monetary moves are going to be a catalyst for the sort of V-shaped move that market players have come to expect in recent years, or whether there is a different set of conditions at work now that are going to keep volatility high and prevent a steady and easy recovery.
While psychology is supportive of a V-shaped recovery, the significance of the news events, the technical damage done, the great level of continued uncertainty and the potential that a recession may develop is going to make it much more challenging for the market to shrug off what has happened over the past several weeks.
The biggest negative in the market lately has been the huge level of uncertainty. Not only do we have few clues as to how the coronavirus may spread in the U.S., but there is even less certainty about the economic impact. Many market participants seem to feel that there is an overreaction to the coronavirus, but even if that is true there are going to be hundreds of companies cutting their earnings estimates as we head into first-quarter earnings season.
It is likely that actual earnings cuts and warnings may turn out to be "buy the bad news" events as hard numbers will allow us to finally fully discount whatever the bad news might be. However, if worries of a recession continue to expand it is going to weigh on valuations.
As you consider the bounce on Tuesday morning, consider that the action at this point is still mostly index driven. Stocks are moving in very correlated fashion and it doesn't much matter if you are in an index or some of the big cap names. Good stock picking takes time to develop but a bounce off the lows is a good first step in helping to create better patterns.
The bounce today is going to produce a sense of relief and there will be many market players that will be fearful that they missed their opportunity to buy at the exact low. That sort of precise timing is encouraged by many market pundits, but it tends to be counterproductive. Most of the folks that are already long are still sitting on losses since they have entered their trades at much higher costs. Most of the people celebrating today aren't making money, they have simply reduced some losses.
Don't be too excited about this action right now. If you didn't panic sell on the way down, then don't panic buy on the way up. There is still plenty of time to build positions if you think that a significant low has been made. It may feel like the worst is over but there remains significant doubt that is the case.
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