The fact of the matter is that markets hate uncertainty! And global risk aversion can continue to sell-off while the uncertainty of the direction of the virus continues. But if you listened to Federal Reserve Chairman Powell on Friday, central banks around the world look to have inched one step closer to intervening in the markets to give the necessary confidence back to the markets. And that is why we saw a hectic week of forced selling end in a positive way on Friday.
But will intervention be enough?? Maybe for the short-term, yes. So far, CDC officials have been extremely accurate with the virus' progression here in the states and foresaw the death that occurred over the weekend here in the US. But, ultimately, there seems to be stages of uncertainty that will need to be peeled-back until global markets see this bout of extreme volatility pass.
It is the affect of the Corona-virus on the global economy that weighs most on investor's minds. At first it may seem shocking, like the Chinese PMI, which plummeted to record lows over the weekend. But here in the states, it might take weeks or months until we see the full brunt of the economic affects. This, however, is a crisis of confidence, which has caught many participants off-guard.
The first thing we will need to see if immediate confidence is restored back to the market, which we got a small dose on late Friday, is when there's global intervention. If there's follow-through to last week's selling, I expect the Federal Reserve and such to step-in this week. This would definitely temporarily restore confidence, but the question to sustained long-term stability depends on a couple factors.
According to Morgan Stanley, the likeliest scenario is that the virus takes the middle course in terms of disruption and lasts into May. This is dependent, however, on containment of the virus, which has been clearly outlined by CDC and various health officials that could most likely take a few more weeks to give the markets the clarity it needs to move on from this period of chaos.
Most importantly to watch, however, will be is the reaction of the financial markets, which once the expected intervention by central banks wear off will be instrumental in deciding how long the road to recovery will be. More specifically, once sentiment has reached an extreme low, history has shown that the selling pressure has likely exhausted. In this case, once the amount of companies trading below their 200-day moving averages in the S&P 500 reaches under 10%, like we saw at what I like to call the "generational low" we saw on Boxing day 2018. There, we saw the measure dip below 10% briefly, which is not terribly far from where we are currently (23.46).
