The Tension is Palpable

Picture of people in hazmat suits wielding a giant hose, representing the drastic measures that the U.S. Federal Reserve is taking to provide liquidity to financial markets.
It Gets The Hose Again
December 12, 2019
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February 27, 2020

I imagine most people have heard stories about dogs refusing to exit their favorite hiding spot or birds making an inordinate amount of chatter before some natural disaster occurs. Having dogs, living in Florida, and knowing how they behave as large hurricanes approach, I have to say that I believe those stories. It seems that, unencumbered by the day to day anxieties that we humans face, they are able to more easily respond to what their senses are telling them. An unignorable intuition.

I am naturally an observer of things. Change and pattern is interesting to me, so I pay attention, which probably explains why analysis seems like a reasonable profession to me. From a professional standpoint, I am constantly observing and evaluating the change in economic and financial factors and conditions. Usually, to me, it feels like I am on a bit of an island in this.

At this present moment – over this last week in particular – some unusual things have been happening in financial markets. Things that usually move or respond one way when something else moves in a particular way have not been responding as expected. Typical correlative relationships appear to be breaking down. To me, it seems as if global financial markets are collectively holding their breath. That is, in general, it looks like no one is willing to make any serious commitment to the future either by changing existing positions or initiating new positions.

I, personally, attribute this to a wait and see attitude towards news out of Asia about any potential supply chain disruption resulting from the impact of COVID-19, the virus that is currently making global headlines. The fact that financial markets are behaving unusually during times such as these is not what is especially unusual or interesting to me. Rather, it is some of the commentary that I have heard from other people about financial markets over the last several days.

I have to imagine that even this is due to the amount of media attention that is dedicated to both COVID-19 and domestic equity markets tickling and achieving all-time highs. However, I have heard the conversational equivalent of my dog curling up under my bed prior to a hurricane from a wide variety of people that would not ordinarily express such sentiments. This ranges from individual investors to full-time professional financial advisors. Although slightly different in each instance, of course, the general sentiment is that they have an ominous feeling about the market. When I provide some examples of what is going on under the surface that might be making them feel that way – things like yields decreasing on rising markets, increasingly lower volume as we approach new market highs, and new market highs on the back of otherwise troubling news – the typical response has been one of, maybe, but something just doesn’t feel right.

To me, this is nothing new. Many things have not felt right for some time now. What is curious is the idea that perhaps broad-based investor sentiment may be at a point of serious reflection. My guess would be that, if COVID-19 is demonstrated to be successfully contained over the next few weeks, this sentiment fades. But I am curious about the effect if it doesn’t.

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