The Week Ahead – Black Swan

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

The possibility of a global pandemic always weighs on investors’ minds, but it is such a low probability event that we refer to it as a black swan. In investment jargon, a black swan is an unpredictable event that is beyond what is normally expected and has potentially severe consequences. The phrase was coined back in the second century by a Roman poet. For nearly 16 centuries, it was mistakenly presumed black swans did not exist. It was not until 1697 when the Dutch explorer Willem de Vlamingh saw a black swan in Australia that the truth was discovered. The point of the black swan analogy is that it is our preconception of what is normal (all swans are white) that can lead to unexpected shocks, such as a pandemic like the coronavirus (COVID-19).

With the coronavirus as the singular focus of the markets, economic metrics this week will likely not hold much sway. After all, the economic consequences of the virus outbreak have yet to be reflected in economic data. Large multinational companies like Apple (AAPL) and Microsoft (MSFT) have warned about how the outbreak will hurt their businesses, but America's economy as a whole is not very reliant on trade and exports, which shields it somewhat from global economic woes. Even though the Federal Reserve (Fed) cut rates three times last year to stimulate the economy, rates still are well above the ultra-low rates from the great financial crisis. The benchmark Fed funds rate now sits at 1.50% to 1.75%.

The Fed will be meeting March 17-18. Expectations of a cut went from just 11% to 100% in one week. A severe pullback in financial conditions acts like a brake on the economy, and is tantamount to a tightening of monetary conditions. It would make sense for the Fed to react swiftly to counterbalance this de facto tightening by reducing interest rates even further.

Data deck for March 2–March 8: