WHO declares a pandemic The Nikkei Average is also expected to rebound significantly after the Major SQ 3/12, Mr. Emori

Tetsu Emori's Real Trading Strategy

【March 12, 2020】 WHO declares a pandemic

Excerpts

〔EQUITY & BOND MARKET〕
【Market Commentary & Analysis on U.S. & European Stocks and Bonds】

The Dow Jones Industrial Average fell by more than 1,000 points from the morning, with almost all sectors selling off. Energy-related stocks declined significantly on oil prices dropping amid tensions among oil-producing nations, and financial stocks were hurt by inhibited appetite for lower interest rates. When the World Health Organization (WHO) declared a “pandemic,” the downside widened further. The previous day had seen gains of over 1,000 points on expectations for U.S. stimulus, and that rebound may have contributed to the subsequent pullback. Recently, there has been extreme volatility with moves exceeding 1,000 points both up and down. Fiscal stimulus is being considered in the U.K., Canada, Japan, and other countries, and expectations for additional easing by U.S., Japan, and Europe’s central banks have grown. However, market participants seem unsure whether these measures are sufficient, given the impression that actions are lagging and that the bottom of stock prices is not yet visible.

【US Stock Trading Strategy】

U.S. stocks have plunged sharply again. Price action is extremely volatile and unstable. Investors seem unable to determine the direction of future stock prices. Even when buying in anticipation of a rebound, many investors want to sell into the rebound, making the rebound itself very sluggish. With the outlook for future corporate earnings deteriorating, investor willingness to buy remains weak, which could be part of why rebounds are slow. The spread of the novel coronavirus has been beyond expectations, which is making market participants cautious. WHO’s pandemic declaration, coming at this time, is arguable given earlier missteps that caused various problems, but for now the priority is to look ahead and act with a forward view.

…

As repeatedly stated, the reason prices do not rebound is that investors are withholding buying due to concerns about the future. It is natural that the outlook for corporate earnings remains uncertain. Goldman Sachs, on the 11th, suggested that the rapid expansion of coronavirus infections would severely hurt corporate profits, causing the S&P 500 to fall 28% from February’s high and signaling that the longest bull market in history could soon end. They furthermore forecast the S&P 500 to drop to 2,450 by mid-year, then recover to 3,200 in the fourth quarter. They also assume S&P 500 earnings per share will fall year-on-year by 5%, with double-digit declines in Q2 and Q3 acting as headwinds.

…

Short-term declines are unavoidable, no doubt. However, the virus will eventually be contained, and there will come a time when this challenge is overcome. By next year, the coronavirus may be forgotten. It is difficult to be so optimistic now, but ultimately investors who bought at low prices will end up smiling. We do not know what will trigger a rebound, and we cannot time the bottom. Yet, looking at past price movements is unnecessary because U.S. stocks will certainly recover. If you think so, there is no reason future stock prices will be cheaper than today. We have already shared various data, and they corroborate this. No further explanation is necessary.

However,there is a consideration to keep in mind: a crash at Lehman Brothers scale could occur, involving declines in stocks, bonds, and gold. Investors may run cash-short and sell safe-haven assets like bonds and gold more aggressively. This phenomenon occurred during the Lehman Shock. While government spending can push bond yields higher and make bonds and gold more likely to be sold, it is prudent to assume that cash shortages drive these sell-offs. Such movements were seen yesterday and warrant caution.

Also, regarding the price movement when the S&P 500 fell more than 5% in a single day on Monday, as noted recently, the only time it fell significantly a week later was during the Lehman Shock. In other words,Be cautious on the Monday when the S&P 500 closes below the 9th’s low of 2,746.56 points. If prices do not rebound quickly, there is a chance of more than a 20% decline within six months.Nevertheless, U.S. equities have shown powerful momentum since then. Rebound will be painful until it happens, but it will come back eventually. If you have funds to weather temporary declines, there is ultimately nothing to worry about.

【Nikkei Stock Trading Strategy】

Nikkei 225 futures have dropped due to the sharp decline in U.S. stocks. Today could see tough price action. However, the yen has not strengthened significantly. Therefore, in the Chicago market the 19,000 level remains, and the Bank of Japan’s ETF purchase cost around 19,500 yen may be factoring in potential buying support. Also, the price-to-book value of Nikkei constituent stocks has surpassed 20,000 yen. That could be part of why selling pressure is not as strong.

Due to the rapid decline in stock prices since late February, a natural rebound often occurs autonomously, but the spread of the coronavirus shows no signs of subsiding, and investor sentiment remains冷え込んでおり, autonomous rebounds are harder to come by. Although countries are introducing monetary easing and fiscal measures like tax cuts, many think investor sentiment will not improve unless virus infections subside.