The market declines of these past two weeks have erased six months of recent gains. Although we are closely monitoring the situation, we may take action in your account quickly if needed in order to reduce risk if conditions continue to deteriorate and alter the long-term investment outlook of your account.

The corona-virus is currently the focus of the market’s attention. The novel coronavirus Covid-19 is now out in the wild; containment in the U.S. seems to be a long-lost hope. In the near term, the authorities are hoping to suppress the pace of the spread of the virus and limit the strain on medical resources. “Social distancing” will be the new norm for the next several weeks, perhaps even longer term, the costs of which will fall most heavily on large gatherings, conventions, travel and tourism. For example, persons most at risk are being advised to avoid public exposure, large groups and travel. Others will be encouraged (or ordered by employers) to work from home when possible. We will see more school closures. The University of Washington and Stanford University have closed their campuses and hope to continue with online resources.

As testing kits become more available, the number of confirmed cases in the U.S. will climb rapidly, not necessarily from new infections, but simply from identifying where the virus has already spread. Until we have this information, there will be a rational tendency to focus on worst case scenarios. That implies the theme of risk aversion will continue.

Markets are not looking good this Sunday evening. Stock market futures and other international markets are down sharply and may open 4% lower or more Monday morning. Oil prices have collapsed from reduced global travel. This has mixed effects on the U.S. economy. Lower oil prices are good for consumers and lower costs of production but will hammer energy producing regions and highlight credit risk in the sector.

The Fed may have to act again before the next meeting, possibly even Monday morning. There is just too much uncertainty for the Fed to try to hold off on further action. Given that inflation was low before the crises, it is now non-existent. Additionally, commerce will soon begin contracting as the social distancing mentioned above begins to take hold further suppressing any inflationary pressures. This gives the Fed sufficient flexibility to make some very large moves, including new QE facilities to stabilize the markets. The Fed may even be discussing taking rates back to zero in order to get out ahead of the data that is far too slowly forthcoming. The Federal Reserve remains at present the only game available with the ability to act quickly and with force. If Congress chooses to respond with some fiscal stimulus, it will be many more months before any could realistically come to fruition.

The good news we had before this outbreak began was that the economy was entering this crisis with significant momentum as evidenced by most economic indicators and measures. In addition, manufacturing had been in full recovery and housing thus far has not wavered from years of steady and solid growth. Housing will now get the additional boost from the lowest mortgage rates in history following the collapse in interest rates this last week. Housing in turn will cushion much of the weakness that will develop in other sectors of the economy.

In summary, it will take some time to fully judge the depth and length of the disruption that lies ahead of us. As virus testing ramps up in the U.S. in coming weeks, so too will the number of confirmed cases. But lacking this clarity, uncertainty and risk will be the major theme in the financial markets. If the Fed learned anything from the 2007-09 meltdown, it is that they need to go big and fast, especially when they have the economic and political flexibility to do so. These additional rate cuts and/or liquidity measures to maintain market stability could come very soon, even as soon as Monday Morning and certainly this week.

If you have any questions, please do not hesitate to call me. If I am unable to pick up your call, please leave a message and I will call you right back. I hope to be sending additional updates and account status in coming days and weeks until stability returns.

Very Best Regards,

Joe

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