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Is Hibernation Over?

Before we begin, let's make one thing perfectly clear. Don't panic! I repeat: Don't panic!

With that out of the way, let's examine the landscape after last week's harrowing market plunge. In a matter of days, the markets were taken apart in spectacular fashion, dropping into official correction territory. The underlying catalyst was the uncertainty of the impact a coronavirus pandemic will have on the global and U.S. economy. In short, FEAR.

Fear though, also provides potential opportunity. So the question at this juncture is are we poised for a rebound or further erosion? If you've read my past posts, you know I've had an abundance of caution as the markets continued a meteoric rise. I'm still cautious, though I won't be surprised to see a relief rally before it gets worse again.

Whether the coronavirus will ultimately be managed effectively remains to be seen, but some damage has already been done. China, arguably hardest hit so far, is the driver of the world's economy. Supply chain disruptions have already made their presence felt. My view is that no matter how you slice it, the impact of that alone will slow the global economy considerably for at least the balance of this year. Countries around the world, including ours, are just starting to experience the spread of this virus. It will likely get worse, before it gets better. But right now, in this moment, there is more uncertainty than certainty.

Fear, whether warranted or not, is a powerful motivating market force. Restoring confidence will be the trick. But what happens until then? I'm cautious for the following reasons. Thus far, we have supply disruptions. The Fed poised to cut rates doesn't address that, plus they have limited firepower given how low existing rates already are. Here in the U.S. we also get to mix in election year uncertainty. Another inescapable fact is the unprecedented expansion of the business cycle, exacerbated by artificial means of tax cuts and rate cuts. That ride may, in fact, be over.

As I write this, Dow futures were initially hurtling sharply lower but have since recovered to indicate the bounce I alluded to earlier might be in the cards for the opening bell tomorrow. Either way, I sense the bear stirring from his long hibernation. Whether he awakes or not is anybody's guess. I'll remain cautious, despite valuations being more attractive after the correction endured so far. Why? Because there is currently enough fear to turn this into a demand problem. One a Fed cut won't solve, in my opinion. Global growth will slow because of China. U.S. growth has been modest, and without the artificial stimulus, will stagnate. If demand takes it on the chin, so will earnings, and so will the market. Travel and tourism is already being affected as countries impose restrictions, universities curtail abroad programs, and people cancel their travel plans. If the virus becomes more widespread, people will begin avoiding malls, restaurants, etc. If schools or daycare are forced to close for extended periods, workers not getting to work as a result will affect productivity. If it turns out to be like the 1918 flu, the market decline will be the least of your worries.

That's what FEAR starts to look like. We're nowhere near that scenario. Maybe this is the biggest opportunity in a while. I don't think so. I'm cautious, but I'm confident there will be some specific opportunities once the landscape is better defined. In the meantime, I'm not inclined to fight the tape.