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Weekly Memorandum 4/13/2020

Futures are basically flat from Sunday's overnight session, as we come off the previous shortened trading week due to Easter. The most volatile market in the overnight session was Crude Oil, as production cuts between the producing-giants were agreed upon, which sent prices up around 4%, but those gains have eased into the morning.

Equities have enjoyed a nice rally off their lows from March 23. It seems like there are a lot of people calling for a "retest of the lows," which is fine, it just may not happen as soon as they'd like. V-bottomed recoveries, like the one that happened at the end of 2018, are not that common. When they do occur, it usually isn't from oversold-levels on longer time frames. In any case, it's still too early to accurately assess the amount of damage the actual economy sustained. The market is a discounting mechanism, so it may take 6-12 months before the damage can be assessed properly.

The proper course of action now seems to have a plan to reopen some parts of the economy. There are definitely areas of the country more affected than others, and those areas that continue to suffer should maintain their precautionary policies. But the United States is a very big country. A one-size-fits-all policy is no longer advisable from a practical standpoint. However, this crisis has made it clear that a lot of people do not understand the inextricable link between public health and the economy. The potential for a Great Depression would cause many deaths as well. A balance must be struck, and decisions must eventually be made to start resuming "normal" life. The big question remains, will normal ever be the same?

It looks like the equity rally could go on for a little while longer. Ideally, we see a secondary low form over the next few months that is higher than the lows formed in March. If we exceed March's low, then that could be the final bottom. The Federal Reserve has gone above and beyond, and we are seeing liquidity restored in the market. A major reason behind the severity of the recent equity decline was that liquidity essentially evaporated. Market participants would place a "sell" order only to find no bid. When there is no bid, you typically see major gap-downs and circuit-breakers activated, which is exactly what was witnessed.

A new Mercator Letter will be published this upcoming weekend, on Sunday, March 19. Stay tuned for other market updates.

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