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What to Make of Market Panic

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Stocks recover some of their Friday losses … a new record in the bond market … tomorrow’s amazing technologies are coming fast

News of a heavily mutated Covid variant, now named “Omicron,” terrified the market on Friday.

The Dow dropped more than 1,000 points during trading, ending down 905 – its worst day of the entire year.

It was a classic case of knee-jerk fear.

The quote below from last Friday illustrates this. I’ve bolded the telltale phrase.

From Yahoo! Finance:

Scientists say the new B.1.1.529 strain is a concern because it harbors a large number of mutations found in other variants – including the fast-spreading Delta variant that exploded over much of the summer – and it seems to be rapidly spreading.

While there’s no evidence yet, health officials are worried that the mutating variant could dilute or resist the efficacy of vaccines.

***On Friday, Wall Street did what it often does – panic first before evaluating

Unfortunately, low liquidity acted like gasoline on a fire, exaggerating the impact of the panic.

Given Black Friday’s de facto “holiday” status, there were few active market participants. So, the panicked stock-owners looking to sell didn’t have the usual volume of buyers.

Market makers had to widen the spread between the “bid” and “ask” prices to lure buyers off the sidelines, leading to many “gap-downs.”

It’s a classic way to lose money.

On that note, here’s legendary investor, Louis Navellier, commenting in real-time last Friday:

If you go trade an ETF today, you could be paying 5%, 10%, 15% spreads. That’s why markets gap down. Spreads widen. If you sell when no one’s around, you get picked off.

So, it’s unfortunate that this Covid-related news is breaking the day after Thanksgiving, when liquidity is very poor…

I don’t want you to worry about these gyrations. Because selling into widespread markets is not wise. Markets are liquid, but they’re liquid at a deep discount like they are today…

Obviously, there will be lots of wild headlines out there, lots of extreme moves. But it’s very, very unwise to trade today, especially ETFs…

Markets can freak out from time to time, but in the end, it all goes back to “what have you done for me lately?” focused on who has the earnings.

***It wasn’t just the market that panicked – world leaders jumped into action on Friday as well, prompting the WHO to ask for calm

From MarketWatch:

The World Health Organization is pleading with world leaders not to engage in knee-jerk reactions to a new variant of the coronavirus that causes COVID-19 that has emerged in South Africa, as a number of countries immediately announced travel bans from that country and some of its neighbors.

And here’s more from The Wall Street Journal:

The European Union said Friday that it would propose activating an “emergency brake” to stop air travel between the 27-country bloc and the southern African region, citing concerns over B.1.1.529.

Several member states have already moved to impose restrictions, following the U.K. and several countries in Asia, including Singapore, Hong Kong and Japan.

South Africa’s health minister, Joe Phaahla, said the travel restrictions were unjustified. He said that there was no indication that current Covid-19 vaccines wouldn’t protect against severe illness caused by the new variant or that it caused people to get more seriously ill than other strains.

Unjustified or not, it seems that these days “panicking” is the safer response if you’re a policy maker. That’s what we’re seeing.

***As I write Monday morning, the markets are rallying as Louis suggested they would

As I write early afternoon, the Dow is up nearly 1%, while the Nasdaq is surging 2%. The gains come after President Biden has said that lockdowns won’t be needed for now.

This is the logical decision since we currently don’t know whether the Omicron variant is more transmissible or more deadly.

In fact, the first South African physician to raise the alarm over Omicron has called its symptoms unusual but mild.

And, this morning, Seeking Alpha reported, “Other South African scientists and health officials have also said there were no signs so far that Omicron led to more serious illness.”

Let’s return to Louis for where the market goes from here. From this morning’s Accelerated Profits update:

Personally, I prefer to let the dust settle and not knee-jerk react to the headlines…

Still, I know there have been concerns about an impending market correction, given that all the major indices are overbought. Stock markets typically have a 10% correction every year or so. But even though the COVID-19 Omicron variant is being used as an excuse for some cyclical stocks to correct, I think any significant correction will be postponed until February.

The fact is December is a seasonally strong month for the stock market. The S&P 500 has historically rallied nicely higher from Thanksgiving through yearend, posting gains 76% of the time since 1995.

Now, we may see more consolidation in the upcoming weeks, but December is great time to add more money to the stock market ahead of another seasonal surge in January. Folks will pour new pension funding into the market as soon as 2022 commences…

So, I encourage you to not worry about the “sky is falling” news media.

That’s always sounds advice.

***Meanwhile, there’s another “What the Bleep” story coming from the bond market

Earlier this year, we began a running series in the Digest called “What the Bleep is Going On?”

Our CEO, Brian Hunt, summed it up nicely:

If you’ve followed the financial markets – even casually – over the past year, you’ve seen a parade of weird events. Events that don’t make much sense when analyzed inside most financial models.

Events that make you wonder What. The. Bleep is going on…

To put it simple, we are living in a World That Is Nuts.

As just a few illustrations, we’ve seen the cryptocurrency sector explode then implode (then do it again)… commodities prices skyrocket… inflation zoom higher to levels not seen in 30 years… the real estate market become white-hot, where an offer price that matches the asking price is laughed off… and the U.S. government print currency and spend at levels that are utterly astonishing.

Well, have a new “What the Bleep” story from the bond market.

From The Wall Street Journal:

Investors’ hunt for higher fixed-income returns has powered sales of low-rated corporate bonds to a record.

U.S. companies, including medical supplier Medline Industries LP and videogame maker Roblox Corp., have sold more than $455 billion of bonds with speculative-grade credit ratings this year through Monday, according to S&P Global Market Intelligence’s LCD.

That already beats the full-year total for 2020, when junk-bond sales set a then-record of $435 billion.

For readers less familiar, a junk bond (or “high yield” or “speculative” bond) is a bond that’s riskier than what is called an “investment grade” bond. Specifically, the risk is that the issuing-company will default on its owed interest payments to investors.

Because of this risk of default, investors require a higher yield from junk bonds. The higher yield offsets the greater risk these investors are assuming by lending their money to these risky companies.

This record-level of buying is a reflection of how out-of-whack the financial markets are today.

Back to The WSJ:

Some market watchers worry that investors are taking on too much risk and that companies are piling up too much debt.

In a recent report, the International Monetary Fund warned that increased leverage could make the financial system more vulnerable to corrections.

What’s craziest of all, is that in recent months, the consumer-price index has leapt above the average yield on junk bonds.

In other words, even for taking on heightened risk by investing in these less-safe bonds, investors are still losing purchasing power thanks to inflation.

What the Bleep.

***A quick positive note before we sign off

Yes, the investment markets are crazy today.

But no amount of craziness will stop the extraordinary technological advancements we’ll see this decade. And last Friday, we got a little preview of an advancement that’s right around the corner.

In short, Apple’s computerized glasses – which are scheduled to hit the market late next year – are expected to be as powerful as a Mac computer. Even better, they won’t require a connection to an iPhone.

From CNBC:

Apple’s computerized glasses will be as powerful as its Mac computers and launch at the end of 2022, top analyst Ming-Chi Kuo of TFI Asset Management said in a note to investors Friday.

Kuo has a stellar track record at predicting future Apple product launches thanks to his research throughout Apple’s supply chain.

Kuo said the huge processing power will help the glasses stand out from competitors since they’ll perform intensive tasks without a connection to a smartphone or computer. Previous reports said the glasses would need a connection to an iPhone in order to work.

Before we sign off, let’s put this tech advancement into perspective.

ZME Science recently reminded readers of the cutting-edge Apollo Guidance Computer (AGC) that helped us land a man on the moon back in 1969.

It was the pinnacle of technological achievement at that time.

It turns out, today’s pocket calculators have more computing power than the best computers used to send astronauts to the moon with Apollo.

It gets crazier.

From ZMEScience:

Thousands of flight technicians and computer engineers at the Goddard Space Flight Center employed the IBM System/360 Model 75s mainframe computer in order to make independent computations and maintain communication between Earth and lunar landers.

These computers cost $3.5 million a piece and were the size of a car. Each could perform several hundred thousand addition operations per second, and their total memory capacity was in the megabyte range.

Programs were developed for the 75s that monitored the spacecraft’s environmental data and astronauts’ health, which were at the time the most complex software ever developed.

Today, however, even a simple USB stick or WiFi router is more powerful than these mainframes, let alone an iPhone…

You wouldn’t be wrong in saying an iPhone could be used to guide 120,000,000 Apollo-era spacecraft to the moon, all at the same time.

Now, keep in mind that the computing power we’ll have at the end of this decade will make our current computer power feel like Apollo – actually, probably less powerful.

We’re thrilled to keep you updated as these amazing technologies transform our world.

Have a good evening,

Jeff Remsburg