Last week of February 24th to 28th of 2020 was the fastest correction ever (-11%) recorded in the U.S. financial markets (S&P 500), stocks skydived worldwide. The fear of the Coronavirus outbreak crushed markets, when they all hit a synchronized air pocket.
More than just the stocks indexes, the ten years interest rates for the U.S. debt, a key indicator of economic health, dropped to historic lows of 1.12% last Friday, and still today Monday, March 2nd reached 1.08%. Investors rushed to buy the safest and liquid U.S. government bonds, pushing prices up to the extreme.
After the commitment of the Fed Chairman last Friday to support the economic growth with further support if needed, the countdown of CME FedWatch Tool, which estimates a market probability of a rate cut in the next Fed meeting, has a 100% probability of a rate cut of at least 50 bps or -0.5% to the short term interest rate, currently at 1.50% to 1.75%, for the next Fed meeting of March 18th.
It seems a bit too much to hope for a -50 bps at once, but an aggressive action to inspire investors may be required to encourage confidence in investor's hearts. Just the hints of these interest rates cuts, inspire investors to rally this Monday 2nd, 2020.
At the same time, the weakest parts of the high yield debt market tumble on an illiquidity gap, causing prices of high-risk debt to drop sharply. The riskier parts of the debt markets had panic selling, a worrisome development that could have prompt a quick reaction from the Fed.
The price of a U.S. WTI barrel of oil reaches for a moment the 43 USD handle, a -18% adjustment from the 53 USD at the beginning of 2020. At just today, as a write these lines, the price of WTI reaches 47 USD or a +5.3% increase.
In a heartbeat, the over-optimistic markets jump over a cliff to the abyss of despair. The market pendulum moves swiftly to the opposite extreme. And today Monday, a quick bounced may cut a fraction of the drop.
When we review stock market prices, after the quick last week correction, they are generally close to the previous five years' values. Of course, when a panic occurs, financial markets may not stop right there, they will go to the other extreme.
The extremely oversold conditions may create violent rallies and more profound valleys. We will be alert to the furious market gyrations and use them accordingly.
So what might be a rational investor game plan?
If you were looking for an entry point and thought everything was too expensive, right now, you may have a window of opportunity of deeply discount asset prices to start building your positions.
If you were well positioned in stocks for the long term, remember nobody knows how long or how much the market may go. You may review your asset allocation, to adjust it slowly to your desired or recommended risk profile once more, sell expensive assets, and buy cheaper ones, if you are not sure, please seek professional advice.
In the long term arc of time, you might remember that these conditions in the past week and the coming months may have been a significant opportunity to a patience investor.