Why Stocks Are Dropping (Hint: It's NOT due to the coronavirus)

By Matthew Milner, on Wednesday, March 11, 2020

Yesterday, Lou shared his research on how previous health crises impacted the markets.

As he explained, epidemics like SARS and Ebola took a nasty toll. But after these crises peaked, the markets quickly rebounded.

Unfortunately, the coronavirus isn’t the only reason stocks are dropping right now.

Today, I’ll show you the three reasons the markets could continue to implode…

And then I’ll start to prepare you financially to survive — and, if you follow our advice, potentially thrive.

It’s Different this Time… It’s Worse

The markets were already a mess because of the coronavirus…

But this past weekend, things got far worse.

That’s when Russia and Saudi Arabia ended their truce on oil production. And that’s why Brent crude futures instantly plummeted nearly 30%.

As Adam Crisafulli, founder of Vital Knowledge, reported:

“Crude has become a bigger problem for markets than the coronavirus… It will be virtually impossible for the [market] to sustainably bounce if Brent continues to crater.”

So in addition to the coronavirus, now we have a new crisis on our hands.

Against this backdrop, let me explain the three reasons this could lead to economic disaster.

Reason #1: The Fed Is Powerless

Last week, the Fed made an emergency decision to cut its key interest rate by half a point.

It was aiming to support the economy. But Wall Street’s reaction was horrible:

After an initial rally, the selling started again. The S&P finished the day down about 3%.

Why? Well, first of all, because the Fed wouldn’t be taking emergency action like this unless it thought something was seriously wrong. This was a signal that our country’s leaders believe this crisis is far worse than they initially thought.

And secondly, rates are already at historic lows…

The fed funds target rate is now 1% to 1.25%. And at the Fed meeting next week, traders expect another rate cut between .75% and 1%.

At that point, if we enter a recession later in the year, the Fed will have virtually no room left to cut rates further.

Bottom line: the Fed is out of ammunition.

Reason #2: We Were Already Vulnerable

The second reason we could be heading into an economic disaster is simple:

We were already vulnerable… we just had our eyes shut.

In other words, a serious downturn was sure to arrive at some point. We just didn’t know what would spark it.

Trade wars, international tensions, political chaos in the run-up to the 2020 Presidential election, beaten-down economies in other parts of the world — nothing ignited selling.

Furthermore, valuations had become dangerously high. And even as the S&P 500 reached an all-time high on Feb 19th, the VIX (Wall Street’s fear gauge) was just above its record low.

But once the coronavirus unleashed itself, all these vulnerabilities hit us at once.

Reason #3: Fear Leads to Extreme Pessimism — and Recession

As Nancy Davis, chief investment officer of Quadratic Capital, said about the coronavirus,

“… the truth is that no one knows what path it will take, how long it will last, and how severe it will be… so the uncertainty will continue to feed higher volatility.”

These thoughts were echoed by Daniel Ives, the managing director of equity research at Wedbush Securities. As he said, the uncertainty around the coronavirus and its potential economic impact is causing a "white-knuckle fear factor among investors.”

The thing is, all this fear can quickly become an economic problem.

When businesses and consumers hunker down, they stop investing, and they stop spending money. And that’s exactly what can cause a deep and protracted recession.

The last time we were hit with a shock like this, stocks dropped by 50% across the board.

Older Americans were forced to rethink their retirement plans, and many had to postpone them indefinitely while they got back to work to make ends meet.

And based on everything we’re seeing right now, the same scenario could happen once again.

Don’t Make This Mistake

After reading my article today, you might be tempted to cash out of your stocks, head for the hills, and hunker down.

But that would be a mistake.

And tomorrow Wayne will explain exactly why.

So stay tuned…

Best Regards,
Matthew Milner

Founder
Crowdability.com

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