Bassanese Bites: Feeling sick – March 16 2020

Last week was one to tell your grandchildren about. And for the younger people around the market, you’ve now been blooded with an example of just how volatile and cruel the equity market can be.  Each generation gets its own meltdown it seems and and now it’s the millennials turn.  It’s why equities outperform cash and bonds over the long-run – you are getting paid to endure the often wild ride!

But this is one for the record books – we’ve now had the fastest descent into a US bear market (20% decline from peak) in history, with the S&P 500 down 26.7% within 18 trading days at its low point last Thursday.  We’ve also seen broader liquidation and deleveraging develop, with  yields on even government bonds rising last week. Credit spreads have naturally widened also, with a move to cash also hurting gold.   My long held view that the $A would hit US 62c this year has been realised, albeit not for the reasons I expected.  My long held call of the RBA cutting the cash rate to 0.25% is next – and it could be as early as this week.  Why wait?

Signs of escalating coronavirus numbers in Europe and the US clearly unnerved investors last week.  Continued dithering over US fiscal stimulus, Trump’s surprise decision to ban European travel, and suspension of America’s basketball season also did not help.  As I write, the Fed has just announced a 1% cut to the Fed funds rate – ahead of its scheduled meeting on Wednesday – taking it back to a range of 0-0.25%.  Anticipation of such a move this week likely helps explain the US market’s huge rebound last Friday, and ironically the Fed’s early move has now denied the market any chance of a further (bear market) rally leading up to its appointed meeting on Wednesday.

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