More U.S. states are declaring coronavirus state of emergencies and concerns about a lack of test kits set a solemn mood. Then European markets stumbled after Saudi Arabia flipped the script, after efforts to get Russia to cut production failed, and the Middle Kingdom announced it would increase production.  Greater supply at the same time there is declining demand is the ultimate negative one-two punch, which sent crude oil prices lower.

There are implications in America for smaller oil companies, which were already struggling with credit and financing, as increasing supply sent inventories overflowing.  The problem is many of these producers have relieved on high yield debt financing, so there is concern there as well.  Ironically, this should be good for Main Street, but less so if folks are hunkering down at home.  I continue to believe the demand side of the equation is more detrimental than supply, but the overall shock has the global financial market in flux.

The street is modeling the next Federal Reserve rate cut of 75 basis points. 

The New York Fed has acted in the repo market to ensure adequate liquidity. Beginning with today’s operation through March 12, 2020, the Desk will increase the amount offered in daily overnight repo operations from at least $100 billion to at least $150 billion.  In addition, the Desk will increase the amount offered in the two-week term repo operations on Tuesday, March 10, 2020, and Thursday, March 12, 2020, from at least $20 billion to at least $45 billion.

Meanwhile, all eyes are on other central banks, including the ECB, which hasn’t budged under new leadership. 

But the street needs to see the federal government swing into action.  The White House has been loath to roll out programs that could be ineffective, as they increase debt levels.   Nonetheless, there is no doubt there must be fiscal policy actions, which might even include loans (read bailouts) to certain industries and small businesses.

Technical View

At this point, traditional chart formations and indictors are less effective, but there are key points on the downside to watch. 

For the S&P 500, 2,750 is pivotal, as there are only small pockets of support from there to 2,400.

I continue to say the market being oversold isn’t good enough when we are in a period of panic.  My county was first to report a coronavirus case in my state, and this weekend I saw calm and upbeat commerce with people enjoying great weekend weather.  But the hype part of this isn’t going away and fear begets fear until we think the coast is clear. 

The market normally sniffs that out before the headlines, and it will this time, but we must deal with day to day swings and testing the resolve of investors – particularly individual investors.

Portfolio Approach

I should have gone to our normal insurance of TLT last week, or earlier, and now I’m worried about chasing. I would rather have cash in model portfolio.