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Alpha Trader Talks Virus Fallout With Ryan Detrick And Joe Brusuelas

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  • The pullback was a necessary one, says Detrick, but the massive flight into Treasury paper is a bit worrisome. It suggests something more than a modest economic slowdown. The question is if that's been priced in at this point.
  • In fact, says Detrick, it may not even take strong economic data to turn markets north again. So much fear has been baked into asset prices that just less-worse-than-feared numbers printing over the next few weeks could be enough.
  • The gap between the earnings yield on stocks and the yield on 10-year Treasury paper is about as wide as you'll ever see it. Detrick expects stocks will outperform bonds over the next 12 months.
  • The economy is facing the triple threat of a supply shock, demand shock, and market shock, says Brusuelas. That's surely going to mean a meaningful slowdown, but he's not calling for a recession just yet.
  • The Fed can and will cut rates, but that can only provide a little cushion to the sort of shocks we're dealing with. Aggressive and creative fiscal stimulus will be necessary, and if the situation gets bad enough, warring parties in DC surely will find common ground to push things through.

This week's Alpha Trader podcast features hosts Aaron Task and Stephen Alpher talking about the market fallout from the coronavirus with LPL Financial's Ryan Detrick and the economic fallout with RSM's Joe Brusuelas.

Editor's note: This podcast was recorded on Friday March 6th - prior to the weekend collapse in the oil price adding to the coronavirus panic.

Detrick has been prepping clients for a pullback for some time, and he notes the correction at the time of recording (just over 12%) was roughly inline with other annual peak-to-trough measures in recent years. What's unusual this time is the massive flight to safety as seen in the huge declines in Treasury yields.

Yes, says Detrick, there will be an economic slowdown coming up, but stocks and yields at the moment are pricing in something way more than that. What may put a stop to the selloff might not even have to be good economic news, but instead just less-weak-than-feared data.

Were you aware that stocks in China - ground-zero for the coronavirus - are at two-year highs? Whether or not one believes the government figures that the damage from the coronavirus has been contained, says Detrick, the financial flows don't lie - money is moving into Chinese shares.

Bottom line, says Detrick, the earnings yield on the S&P 500 is in the neighborhood of 5%, while the 10-year Treasury yield is below 1%. That's a spread of more than 400 basis points - one of the cheapest reads on that measure going back 70 years. Cheap can absolutely become cheaper, but Detrick and team are telling clients stocks will outperform bonds over the next 12 months.

It's a highly unusual three-way shock facing the U.S. economy, says Joe Brusuelas - that's a supply shock, a demand shock, and a market shock. Even with all that, he's not expecting a recession, but instead an H1 slowdown to less than 1% growth (mostly to be seen in Q2 data).

The Fed cut was necessary, says Brusuelas, even if it might be ineffective at addressing the causes of the recent troubles. The issue, he argues, is that nothing - for now - is moving on the fiscal side, and that's what's really going to be needed to combat this slowdown.

Going forward, these shocks are going to manifest themselves in bankruptcies and unemployment, particularly as it relates to small- and medium-sized enterprises. The president and Congress are going to need to work together and be creative. This president and this Congress? Yes, says Brusuelas, and if things get bad enough, the two branches will find common ground to get things through. Even something like the payroll tax break that's been bandied about is a great idea. Brusuelas reminds that this was a feature of the crisis response in the Obama administration, so there is some precedent.

Brusuelas looks at plenty of indicators, but if he had to pick just one it would be the 13-week moving average of initial jobless claims. When it moves above 242K, it's time to get worried. While only about 212K now, the layoffs at the West Coast ports have begun, says Brusuelas. He figures it'll take about 2-3 weeks before those begin to translate into the jobless claims numbers.

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Alpha Trader is a weekly investor-focused podcast produced by Seeking Alpha that will dive into the most impactful market news and set the stage for upcoming market events. Hosted by Aaron Task and Stephen Alpher, episodes will be available every Tuesday, and will include discussions with market experts on topics relevant to active traders.

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Comments (6)

Bin there dun that profile picture
I am 100% convinced that the Chinese deliberately unleashed a biological weapon in the coronavirus upon their own populace, knowing full well that the disease would spread and disrupt the USA economy. I only theorized it previously, but now I am totally convinced that this was a deliberate attack on the United States by China. We are at war, although undeclared.
FFS they try to get as many illegals into the country as they can.....as party policy, illegals who aren't vaccinated or quarantined, and they want to hold this Chinese virus against Trump. LOFL at them....all day and twice on Sunday.
Where was the WHO? They couldn't even contain this to Asia!!
Trump works to mitigate the problem while Democrats pitch fits and foam at the mouth grasping for another straw since Biden and Sanders are both looking like fools.
profit_piers profile picture
you are correct! but I'm locked from upvoting you. politics.
Contralogic profile picture
Is that you Rush?
The Democrats trashed Trump for Blocking flights from Wuhan... but you know... it woulda been so much different under Democrats. And man if Bloomberg was president he's be lining up to suckle Do Jinpings nether regions.
Chillbizzee profile picture
I’m not convinced the democrats would give an economic and stock market win to this candidate. Nor that yield will be enough for the risk.

But supposedly it’s the common man that’s been doing the buying not selling. Maybe with all the index buying and buy & hold preaching “this time is different”.
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