• Coronavirus fears made for a volatile week, but most indexes ended higher.
• The Fed’s emergency 50-basis-point cut underscores central banks’ commitment to supporting easy financial conditions.
• We believe we are in a bottoming process, but markets may need more time to get there.

Stocks had a very volatile week, but most averages finished higher with the S&P 500 up 0.6%.1 Despite the volatile week, markets were supported by oversold conditions, Joe Biden’s Super Tuesday performance and better coronavirus news from China. The spread of coronavirus outside of China is still the bigger issue, with South Korea, Italy and Iran areas of concern. There are more cases in the U. S., with more expected. It’s important to note that stocks reached an all-time high just two weeks ago. Stocks started the year overbought and overvalued. Fundamentals, while improving, were mixed and a pullback made sense, but its speed and pace were a surprise.

10 Themes To Consider Amid Volatility

1. A growing body of evidence showed an improving global economy coming into 2020. Central banks cut rates 100 times last year; U.S. gasoline prices declined more than 15% in the last nine months; and global short rates were down 100 basis points. In addition, the 10-year Treasury yield plunged more than 200 basis points over the last 15 months, and mortgage refinancing activities rose threefold from a year ago.

2. The Federal Reserve’s Beige Book report conveyed ample concerns from firms over the coronavirus, but little effect on activity. While there were some discussions over supply-chain delays and declines in tourism and travel, activity was actually slightly firmer than one month ago.

3. Good news on the labor front: Non-farm payrolls added 273,000 jobs, 100,000 more than expected with noticeable upward revisions. The three-month average is now the best since the spring of 2018, and year-over-year earnings gains continued at a 3% pace. With the unemployment rate at a multi-decade low of 3.5%, the labor market was on very solid footing entering the coronavirus virus shock.

4. Central bank moves are not surprising, given the sharp deterioration in the global growth outlook. The U.S. Fed acted preemptively by cutting rates 50 basis points last week, with possibly more to come. It was the Feds’ first emergency action since October 2008, during the heart of the financial crisis.

5. It’s impossible to know how severe and protracted the disruptions from coronavirus might be. Since World War II, earnings typically fell an average of 18% from peak to trough in a recession, according to J.P. Morgan, with earnings dropping 9% during mild recessions and 25% during deep ones.

6. We are concerned about coronavirus, but are more concerned about the fear and precautions being taken in advance of it, which could cause its own economic recession.

7. The current market volatility was prompted by concerns over the supply chain out of China, which probably would lead to slowdowns, but not a recession. Now, potential U.S. demand problems raise the probability of a recession.

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