One way to think about the markets is that they represent a real-time barometer of traders’ and investors’ opinions about the economy. Think of it like peering into part of the collective national subconscious.
Right now, the charts of the markets are very clear:
1.) A recession probability is increasing, and
2.) The markets have no confidence in the current administration’s response to the coronavirus.
Above are four ETFs that track commodities (DBC), the 7-10 year treasury market (IEF), equities (SPY) and the dollar (UUP).
Commodities (DBC) are at a 2-month low, largely as a result of Saudi Arabia’s “turn on the oil spigots” move over the weekend, although industrial metals are also at yearly lows. Commodities — which are the raw materials of, well, everything — rise in value when investors think the demand for products will increase. The opposite is also true — a drop in commodity prices means lower demand, which, in turn, means slower economic activity. The fact this ETF is at a low means investors see slower growth on the horizon.
Meanwhile, treasuries (IEF) are at a 2-month high. Treasuries are a “safe haven” asset; investors increase their purchases when they are scared and/or when they see slower economic growth on the horizon. That is definitely the case now. China’s economy will be slow for at least the first half of the year; Japan’s economy contracted in the 4Q19; South Korea was already slowing; Italy will undoubtedly slow since they’re quarantined a key industrial region, as will some of the other larger EU countries. All of this makes government bonds an attractive investment.
As a result, investors have sold equities, sending the SPY to near yearly lows. Investors think that overall economic activity will slow, which decreases corporate profits, lowering share prices. Also, remember that the stock market is a leading indicator — prices also include a determination about future economic activity, which is obviously bearish.
Finally, there’s the dollar. A key reason why a currency increases in value is investors think that the country’s economic growth will increase. This makes it more attractive as an investment, which means people want to invest there. SO, they’ll need to buy the local currency, sending its value higher. Reverse the process in a downturn, which is what is happening now.
The markets have voted. They’re not happy with the future. And the administration’s “response” certainly hasn’t helped. Don’t believe me? Imagine you’re a trader and the president tweets this:
The prosecution rests.