By Mike Whitney
February 28, 2020 "Information
Clearing House" -
There are three main reasons
why stocks are falling hard.
1– Uncertainty. It’s
impossible for investors to gauge the economic
impact of the rapidly-spreading coronavirus or its
effect on stock prices. Investors buy stocks with
the expectation that their investment will grow over
time. In periods of crisis, when the environment
becomes unfamiliar and opaque, expectations are
crushed under the weigh of uncertainty. When
expectations dampen, investors sell.
2– The Fed. Although
investors have not faced a challenge like the
coronavirus before, confidence in the Fed has
remained surprisingly high. For the last 10 years,
investors have seen multiple interventions by the
Fed that were aimed at keeping Wall Street happy and
stock prices high. Only recently have investors
begun to doubt the Fed’s ability to stop the market
slide by slashing rates or increasing liquidity. As
more investors realize that the Fed does not have
the tools to address a supply shock, the selloff is
likely to accelerate.
3–Stock buybacks. In
the last few years, stock prices have not been
driven higher by institutional buyers or Mom and Pop
investors. The rise is almost entirely attributable
to share repurchases or stock buybacks as they are
called. According to the Harvard Business Review,
“In 2018 alone, with corporate profits bolstered by
the Tax Cuts and Jobs Act of 2017, companies in the
S&P 500 Index did a combined $806 billion in
buybacks, about $200 billion more than the previous
record set in 2007.” Coronavirus is dramatically
impacting corporate earnings projections and many
analysts are predicting recession. Shrinking
revenues and profits will put a damper on the
jet-fuel that had been pushing stocks higher.
