Weekly Memorandum 2/24/2020

Equities are down significantly across the board this Monday morning. This is something we warned about in previous weeks. Last week's column stated, "In the short-term, our work still suggests we are set for a pullback in equities in the U.S. The long-term trend, however, remains solidly up, and it would take quite the sell off to alter this position." Naturally, the news headlines will say that stocks are down because of the coronavirus. While we are not totally discounting the severity of the illness, those same articles will fail to mention that stocks have gone up for nearly 6 months straight--we were, and are due, for a pullback. Our levels of support for equities was provided to subscribers in last week's publication of the Mercator Letter.


In light of equity weakness, capital is seeking refuge in three assets: Gold, Treasuries, and the U.S. Dollar. Granted, most of these trends began quite some time ago, but their pace increased in the last few weeks, which was a warning signal that something was wrong. Gold is now flirting with the 1700 level after being below the 1200 mark in mid-2018. Even Treasuries look primed to exceed their 2016 highs. This may sound crazy now, but we really have to be open to the possibility of the 10-Year Treasury yield going to 0%.


The U.S. Dollar still finished up last week, but we may see the currency consolidate some of its recent gains in the coming weeks. The U.S. remains the best house in a bad neighborhood that is the global economy, and it continues to outperform even as equities decline. In this sense, outperforming with respect to the downside happens when a market declines less than another. This is called relative strength, and it should always be noted.


Crude Oil also nudged up last week, but we've already seen all those gains erased before the market even opened. The U.S. Dollar remains a headwind for the commodity, as well as lower inflation expectations going forward. With the coronavirus affecting China the worst, we are seeing demand for energy fall, as China is one of the world's largest importers of Crude Oil.


This is looking set to be an exciting week filled with volatility. The main thing is to not panic, and stick to your plan. If you don't have one, then maybe it's time to sign up for the Mercator Letter. Rest assured the market headlines will be off the wall if volatility persists in the short-term.

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