Markets stocks

‘If You Can’t Trust A Fix, What Can You Trust?’

"It's gettin' so a businessman can't expect no return from a fixed fight".

Friday found investors fretful headed into yet another “virus weekend”.

US equities have retreated on three of the four Fridays since the coronavirus scare kicked into high gear late last month. In short (no pun intended) nobody wants to carry risk into the weekend.

The number of cases in China rose to 76,288, with 2,345 fatalities, as of Saturday, officials said.

Honestly (and sadly) I’ve stopped charting those figures on a daily basis. China has revised and re-revised the methodology as it relates to tracking cases at the epicenter in Hubei, making it very difficult to determine what, exactly, is going on. Attempting to run even the simplest statistical tests on data that’s revised for reasons that aren’t clearly communicated is an exercise in abject futility.

Of course, the market is inherently distrustful of any data out of China, but now you can’t even depend on a consistent approach to massaging the already unreliable figures. As Johnny Caspar (Jon Polito) put it in the Coen brothers’ mob masterpiece Miller’s Crossing: Now, if you can’t trust a fix, what can you trust?”

Banks and boutique research firms have simply added footnotes and caveats to account for the ambiguity. Below is an updated visual from Capital Economics with demarcation lines for methodological changes (at the time of writing, Capital Economics was still making some visuals available to non-clients here):

(Capital Economics)

Speaking of not being able to trust a fix, the language deployed in a Bloomberg article on Saturday underscores the level of conviction most investors now have in the notion that stocks “should” only move in one direction, come hell or high pandemic.

“If complacency was the charge, the market just delivered its punishment”, the piece reads. “As the coronavirus spreads and US business activity takes a hit, the S&P 500 Index notched its first weekly decline since January”.

The S&P has actually fallen in three of the last five weeks, but is still marginally higher since the onset of concerns.

That, even as long-end US yields fell to record lows on Friday.

“All told, this is a mild setback for stock traders who’ve been pumping up markets to records”, Bloomberg’s Justina Lee writes.

I concur, Justina. And, as illustrated above, there really hasn’t been a “setback” at all for US equities since the virus started to dominate the macro narrative – stocks are still higher. And Lee puts her finger on why. “The Fed is standing by if risks from the virus spill over to domestic shores”, she goes on to write, noting that “the Goldilocks-lite scenario in a liquidity-driven world is largely intact — even if the virus undercuts output in the coming months”.

US inflation is subdued, and although Friday’s shockingly bad IHS Markit PMIs underscored the vulnerability of the domestic economy, one could easily argue that if the Fed needed a little extra push to convince the committee that market pricing is “right” (never mind Clarida’s dismissal of the “hall of mirrors” effect), maybe a few bad data points will do the trick.

The “problem” right now is that the virus is testing US equities’ immunity to macro shocks.

That immunity isn’t really “immunity”, though. Rather, equities have been rendered numb to any and all uncomfortable realities, first by dozens of rate cuts from global central banks in 2019, and then, starting with the repo shock in late September, by Fed liquidity provision.

But now, big-cap tech is losing momentum despite Fed liquidity – gasp!

I’ll leave you will the full quote from Johnny Caspar:

It’s gettin’ so a businessman can’t expect no return from a fixed fight. Now, if you can’t trust a fix, what can you trust? For a good return, you gotta go bettin’ on chance – and then you’re back with anarchy, right back in the jungle.


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