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The Big Test For The US Economy

The opinions expressed by columnists are their own and do not necessarily represent the views of Townhall.com.
AP Photo/Richard Drew

Well, it was another rocky session on Wednesday, although, in a strange way, it was a lot more impressive after losing a major rally. 

Here’s my line of thinking.


As the coronavirus stories mounted from additional nations reporting new cases to speculation about cases in America, headlines sparked selling. However, the vast majority was computer-driven.

(A radio station’s report about health officials in Nassau County, New York, monitoring 83 people who visited China, or may have come in contact with the virus, extinguished the last rally attempt.)

Still, the whipping around was unnerving for many, especially after the Dow rallied 461 points, and the S&P 500 was up 1.7% before investors watched it all melt away. 

Therefore, I’m impressed with the action, particularly at the end of the session when the dam broke and fewer sellers emerged.

This process is ferreting out weak hands, even those that thought they were strong a week ago. There could be additional headline jolts, particularly when the World Health Organization (WHO) officially labels the virus a ‘pandemic.’

Interestingly, as China’s official numbers get better, we might see the WHO affix that label while praising President Xi. I’m not sure how many countries need to report cases for the distinction, but there are more cases outside of China than inside China.

Political Theater

Yesterday, San Francisco declared a state of emergency, although the city hasn’t reported any coronavirus infections. There is no doubt the city has a lot of residences that travel back and forth to China, but there was a bit of grandstanding to the news.


On Tuesday, Senator Schumer took a shot at the White House, which made it appear the nation was already in the throes of a full-fledged plague (not an official epidemiology term). These political attacks might be common these days, but we need leadership to avoid fearmongering.

Last night, President Trump held a press conference to discuss the task force, led by Vice President Pence, that will focus on five areas to combat the spread of the virus:

  • Expand surveillance
  • Support state and local municipalities
  • Create therapeutics
  • Create vaccines
  • Invest and buy productive equipment

Bond Yields & Safety

The yield on the ten-year Treasury bond tumbled to an all-time low, as money continues to pour into the haven with fewer global rivals. Global economies are slipping into recessions, and negative bond yields mean the buyers have the privilege of paying the government money for holding their paper. On the other hand, a 1.32% yield is paltry compared to the overall yield of the S&P 500.

The Mighty American Consumer

Yesterday, the number one percentage gainer in the entire market was T.J. Maxx (TJX), which posted strong financials and hiked their dividend. For all the talk about brick-and-mortar retail losers, the winners are doing extremely well.


Last year, saw annual sales go up 3.7%, which was just short of the National Retail Federation (NRF) estimate of 3.8%. Online and other non-store sales grew by 12.9%, which was better than the forecast of 12.0%.

The NRF 2020 Forecast:

  • Retail sales: $3.93 trillion to $3.95 trillion
  • Online sales: $870.6 billion to $893.9 billion
  • Monthly job gains: 150,000 to 170,000 (175,000 average, 2019)
  • Unemployment rate: 3.5%
  • The Gross Domestic Product (GDP): 1.9% (2.3%, 2019)

Portfolio Approach

We are lowering our weighting in Industrials to a 2 weight and raising Cash to 15%.

Today’s Session

Last night, Microsoft (MSFT) warned its personal computing business, which includes windows installation, laptops and tablets, would be below prior guidance because manufacturing is coming back on line slower than anticipated.

The warning is similar to the one issued by Apple (AAPL) last week.

This is important, as investors look over their portfolios and make difficult decisions.  There is a distinct difference between demand and supply shocks.  The latter is hurting technology stocks, while the former is hurting businesses that involve large public gatherings, particularly in confined spaces.

These things generally work themselves out, and investors can make adjustments until then.  But the greater risk is a lost in confidence by the American consumer, because that would impact demand for everything.


Confidence levels are extremely high, with several readings at all-time record levels, but it can be fragile, and that makes the next several weeks extremely important. There are signs the U.S. economy was reigniting, and actually picking up more steam: see the most recent housing and manufacturing data and this morning’s surprise increase in business durable goods orders in January; excluding transportation, new orders increased 0.9 percent, and excluding defense, new orders increased 3.6 percent.

In addition, earnings that correlate with consumer confidence have been much better than expected. 

But all that momentum is being interrupted. 

How long the interruption depends on the public’s perception of how well the coronavirus is being handled. It also depends on how the market trades through March, as it plays a pivotal role in consumer psyche. 

You know that old wealth effect thing.

On that note, Wall Street is now demanding action from the Federal Reserve, which means once again Jay Powell’s job goes beyond employment and inflation.  It’s moments like this when I’m glad he’s not an economist. By the same token, he will have to ignore the implication he is being pushed around by President Trump and Wall Street.


As things stand right now, I think the market is way oversold, but you know, I have always said that doesn’t mean it can’t go lower.  Underlying fundamentals are why long-term investors hold and buy weakness in shares of great companies during pullback and correction periods, and right now those fundamentals sit on top of a strong and confident consumer.

This is the big test for the economy and the stock market.

There are great names I want to own, but there is no urgency to buy per se.  But we are entering a period where great names are going to be too cheap to resist, even with near term volatility and risk.

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