Time for Some Risk Assessment

Stocks hit new highs on Wednesday before succumbing to renewed coronavirus fears and some weak economic data. And it seems that the bad news -- or at least what on paper appears as bad news -- is now starting to pile up. Let's break down some of what's happening over the past week or so, and figure out what it means going forward. Et Tu, Services? Every time we get weak manufacturing data, there is a chorus of bulls ready to point out that the U.S. has shifted from a manufacturing economy to a service economy. I agree with that assessment, which is why I'm fixated on the weak services data from Friday. So, let's talk about services. After being a pillar of growth, services started to weaken last summer, contributing to the recession fears that peaked in August. Those fears vanished as the Fed injected money and hopes for a trade truce took hold of the market, along with some strong seasonal factors. I do not know if a drop in tourists from China impacted this month's services report, but with travel restrictions in place, I expect we will be unpleasantly surprised by the impact that fewer Chinese tourists have on the economy. That impact will hit the all-important services sector, which had been resilient. Yes, there has been some positive data, but right now I can't help but fixate on this and the abysmal data from Japan the prior week. Valentine's Day Downgrade Makes Good Headlines On Valentine's Day, The Kraft Heinz Company was downgraded to junk status. This week, Standard and Poor's downgraded Macy's to junk. I'm not that worried about the markets being able to absorb these downgrades, but I am concerned we may be seeing a shift in the mentality of rating agencies. They may be trying to get ahead of any economic weakness. That could mean a steady drumbeat of downgrades, which the media will fixate on. That in turn will put pressure on risky bonds (high yield and leveraged loans) and stocks. Passive Bond Investing Could Push Yields Even Lower Remember, passive investing doesn't care about price; all it cares about is inflows or outflows and current index construction. There will be buying of treasuries regardless of price, with big inflows into long-dated treasury exchange-traded funds like iShares Barclays 20+ Year Treasury Bond and ongoing steady flows into broad market bond funds like iShares Barclays Aggregate Bond Fund and the Vanguard Total Bond Market ETF . Coronavirus Continues to Concern Reported new cases of COVID-19 in China have been declining. That is the good news, but several prominent U.S. politicians have now openly questioned the veracity of the data. The death rate has increased to around 3%, according to official statistics, but the recovery rate has soared to over 30%. That last bit of data would be good news, but everyone seems to still be pricing in extremely high recovery rates. Reports of young, previously healthy, health care workers dying from coronavirus are trickling in. This would go against the theory that only elderly people or those with pre-existing conditions are at risk. I remain worried that we are still too complacent on what the stats mean and who is at risk. South Korea has jumped to the forefront of cases outside of China. The rapid progression, from a handful to over 800 as of Monday morning is alarming. It's also in line with exponential growth. Italy has seen cases rise dramatically, too. There is the cruise ships long docked in Asia, which had a large number of cases that aren't being attributed to any particular country. All of this is a stark reminder of how aggressively the newly discovered coronavirus can spread. Stories that the incubation period should be expanded to almost a month are disturbing. Stories that some evacuations have involved mixing infected people with those who are not infected seems like an odd way to deal with containing the virus. Japan allegedly has also not been as careful as it could have been in regards to ongoing containment. Will there be more travel restrictions? Will South Korea or Japan react more aggressively to rising cases? Italy too might react. Travel restrictions hurt not only global trade, but economies directly. Supply chain stories are mixed, as some suppliers are coming through, and most companies have enough inventory on hand to deal with any short-term production shutdown, but as this drags on, expect supply chains to become a bigger issue. My advice: Stay in risk-off mode and stay safe. While it might be tempting to buy any dip, it is too early as the realization that coronavirus might not be contained in an already weak global economy needs to be priced in.

Time for Some Risk Assessment

While it might be tempting to buy any dip, the coronavirus' quick spread, recent downgrades, softness in services and other factors should give pause.

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