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TWELVE o’clock TUESDAY – 3/31/2020 - Stock Market Report

Bearish … rating of 4 (0 - 4 is bearish, 5 is neutral, 6 - 10 is bullish).

WHAT’s HAPPENING: Wednesday’s price action confirmed “what was going on in the markets” and revealed what was, for me, the most significant factor behind the swift and powerful rally in stocks - institutional investors had been wanting to sell bonds, but were unable to do so, until the Fed began to supply liquidity to the markets in its role of lender of last resort.

REASON: institutional investors wanted to sell bonds and take bond profits from such low interest rates, generate cash, and buy stocks for higher yields with dividends higher than bond interest and potential for capital gains from such low stock valuations. (Note: the stimulus package was a driver, being positive for stocks, but negative for the national budget deficit and bond interest rates).

HOW: For the first time ever, the Fed provided liquidity to the municipal and corporate bond markets, and the mortgage bond market too, in addition to its work in Treasury securities.

WHAT’S NEXT: We may be in the midst of a powerful bear market rally, or we may have hit bottom and are looking ahead to better days. We are confined to our homes – why? – essentially, we are buying time, waiting for medicine to catch up with the spreading virus. And, that is happening. There are Coronavirus test kits now (from Abbott Labs) that can show the presence of the virus within 5 minutes. Respirators are being manufactured (by car manufacturers) to get equipment to patients with severe need. Hospital capacity is being increased (Navy ships being used as floating hospitals). Experimental trials of existing medications (malaria meds) are showing some relief. And, Johnson and Johnson has an accelerated trial for a vaccine to be available early next year.

If there is another selloff that takes the market down near the old lows, it seems that it would come from either much worse earnings than forecast, or a severe setback from a new outbreak of the virus.

So, I’m sitting at a Bearish rating of 4 awaiting earnings, medical developments, and the newest statistics about the spreading virus. We just don’t know enough about this virus (from how it spreads, whether it spreads during the summer, to whether it comes back this fall) for me to be any more positive.

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