With the Bank of Japan's recent enactment of yield capping, the Fed has closely followed suit, pursuing a similar policy that was employed during the 2007-2009 recession, quantitative easing. Quantitative easing is the idea of enacting a fixed open market transaction of long-term treasuries. However, yield capping would result in unlimited open market transactions of short-term treasuries, offering a huge influx of capital into the markets at whatever rate the Fed chose. In combination with the current pandemic, this leaves investor uncertainty moderately high.
China's economic growth has been slowing. While there was a lot of consumption and travel during the first quarter, we believe it will be significantly curtailed. There will be a reduction in tourism, travel, retail sales, etc. What will the economic impact be? It is difficult to quantify, but the 6% growth target from China will be difficult to attain this year. It will be important to look towards China's economic and monetary policies in the interim, and, should the pandemic continue into the next quarter, it will make this goal nearly impossible to achieve. Consumption-driven growth is particularly high in the lunar new year, and the impact of this disease shaves the growth significantly.
Markets are incredibly volatile, as one would expect, with the outbreak of the coronavirus and the commencement of the impeachment trials in the senate. However,
I find the markets to be incredibly hyper-sensitive to this type of news. We firmly believe that markets move in trends, and more importantly, the market already discounts things. Furthermore, when looking at the AIDS outbreak of ’81 or the more recent Zika Virus, we see that those pandemics did not have as tangible an effect on the indices as might have been expected. This doesn’t necessarily represent a buying opportunity right now. As history depicts, it is best to allow these pandemics to pass before initiating any bullish position, in spite of the indices’ retraction. Johnson and Johnson has begun development of a vaccine in hopes of controlling the number of people affected. Moderna INC (MRNA), Inovio Pharma (INO), and Novax (NVAX) are also premarket gainers, with each company having possible vaccines in the FDA pipeline. We expect each of these companies to see sharp gains in the near future, on the prospect of producing a vaccine. Moderna and Inovio have been granted funding for vaccination programs in response to the coronavirus outbreak. They anticipate rolling out trials for the vaccine in three months’ time. LJMB Capital advisor's hold the firm belief that the final leg of this bull run is persisting, and they expect levels to rebound from robust earnings slated for reporting for this week. Furthermore, the market does not seem overpriced when considering cash flow growth year over year. Firms’market caps are not increasing simply because people are buying at record levels, which they are, but rather from massive growth in cashflows. Price to cashflow is seemingly constant, and, therefore, leads us to believe we are indeed in a small retraction of the stock market.