Last week was an exceptionally difficult week for risk assets, emphasized by Thursday’s record 1,192 point drop in the Dow Jones Industrial Average - a selloff sparked by growing concern that the Coronavirus could prove to carry a greater weight on global growth than originally thought. Further - and not to pick sides on the political front - the ascendancy of the Sanders campaign became another concerning point for many on Wall Street, given the candidate’s proposed policies generally viewed as negative for the markets. It has been a stressful several days, to say the least. There are ways we can all best navigate this stressful stretch while maintaining a proper perspective about the market. Our advice focuses on what we know about the dynamics that ultimately drive risk assets: monetary policy, fiscal policy, and economic fundamentals. For now, the Federal Reserve is not only not interested in raising interest rates, but is also likely to lower interest rates again if the Coronavirus isn’t soon contained, the Federal tax code and regulatory construct remain supportive of growth and Federal deficit spending is an economic tailwind, while the linchpin of our economy - the US consumer - is in very good shape, aided by low unemployment, low gasoline prices, and a high savings rate. All this taken together, leaves us more optimistic than not on the outlook for the US economy and US stocks. That said, we do continue to expect heightened market volatility - the Coronavirus and the upcoming election are known catalysts; however, drawdowns are part and parcel of investing and we don’t see recent market weakness as the beginning of the end of our record bull market.

Finally, if we need a data point to help alleviate the stress of the past several days, we could do worse than the St. Louis Fed Financial Stress Index. At a high level, the Index seeks to measure the degree of financial stress in the markets and is constructed from 18 weekly data series, including interest rates and yield spreads. Launched in 2010, the data set goes back to 1993. A reading of zero is viewed as representing normal financial market conditions, while values below zero and above zero suggest below average and above average financial market stress respectively. Recently, the Index hit an all-time low of (1.60). While it is a limited sample set, history shows we need to see a spike in financial stress in the markets before the real economy is at risk of recession.


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Headline source: Chart source: Federal Reserve Bank of St. Louis.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Tagged: Tim Holland, weekly wire, market perspectives, S&P 500 Index, Coronavirus