March Commentary

Wade A. McFee Comments

I have been asked several times in the past two weeks: “Why are US stocks falling? Is it the Coronavirus?”

My answer is: “I don’t understand why the US stock market climbed 30% in 2019 while Earnings of US Companies which were expected to go up 23% BUT actually declined by 1%.’ ‘The US Stock Market expectations were for a 23% increase again in 2020 at the beginning of the year and sit at 26% estimated earnings increase THIS YEAR.’

Simply put, IF companies could not grow earnings in 2019, the Coronavirus causing plant closures in China, South Korea and Japan with the ensuing ‘supply chain’ disruptions for everything from iPhones to tractors are not going to be easily overcome.  The Travel Industry is in a ‘free fall’ with airlines, hotels and large Conventions having been cancelation through the summer of 2020 which will not be helpful to economic growth.

If we were to see US Companies Earnings decline again in 2020, there is little reason to believe the 12% decline in stock prices we have witnessed so far in 2020 is just the beginning. 

My best guess is the longer the Coronavirus stays in the headlines, the further the ‘supply chain and travel industry’ deteriorates, the lower US and global stocks decline.

“The Federal Reserve has panicked this week with the ½% decline in the Federal Funds Rate.’ Says Jeffery Gundlach of Double Line Capital this week. “And the Fed will most likely lower rates again next week.’ Added Gundlach.  I believe the US rates head to 0%-.5% which should cause the US Dollar (UUP) to fall against world currencies. Consider refinancing your properties in another month or two!

Some very good opportunities have emerged for Bond Investors.  With short term bonds are up 1% (SHY) and longer-term bonds are up 4% (AGG) this year, safety has done its job of stemming portfolio losses. This will most likely continue. 

Today, US Employment climbed by 278,000 people and the US Unemployment Rate declined to 3.5%, the lowest on record. So, perhaps the US Economy is still chugging along.

Factories in China are beginning to reopen this week, but, they most likely won’t be at full capacity for some months. 

From here, I am still thinking US Stocks are 30% overvalued. Emerging Market (EEM) declines of 15% may have priced in much of the Global Economic slowdown due to the Coronavirus. But, we most likely will not know the full impact of the Virus until Summer or Fall of this year. 

It is interesting, I have been talking for two years about the US Stock price bubble, but, I have not known what might be the ‘event’ that would bring the market back down to earth.  It wasn’t US Presidential Impeachment.  Apparently, the Coronavirus looks to be that event. 

Disclosure: The information and opinions presented here are those of Wade McFee and are for general information only and are not intended to provide specific advice or recommendations for any individual. The opinions, views and information expressed in this commentary are subject to change without notice based on market conditions and other factors. You should contact your investment representative, attorney, accountant or tax advisor with regard to your individual situation.