Commentary for the period ending 4-30-20

Hello all – it was a great month for the markets and we hope it was for you, too, despite the current circumstances.

Stocks rebounded swiftly from one of the worst declines on record.  In April, the Dow rose 11% and the S&P gained almost 13%, both turning in their best month since 1987.  The Nasdaq, which has more tech companies, was higher by 15% for its best month since 2000. 

A look at the markets so far this year:

Volatility has also subsided.  It’s still at a high level because we’re still seeing some big moves in the markets, but it’s well below the levels we saw last month.

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There were many reasons for the rally.

One reason was that the market simply fell too hard, too fast.  Drops like these tend to have quick rebounds.  Sometimes the rebounds last…sometimes they don’t.  For now, though, the rebound has held up.  We’ll have more of our outlook later in this commentary.

Another reason for the rally was the gradual reopening – or potential reopening’s – of many regions of the country.  The entire country was virtually shut down at the worst of this crisis, with many companies ceasing operations.  Now the markets are reacting to a reawakened America where businesses and employees are slowly getting back to work. 

The final reason for the rally is the stimulus from the government and the Fed.  We’ve seen an unprecedented amount of spending.  In just the last six weeks, the federal government has spent or appropriated nearly $3 trillion. 

The Fed is also printing trillions.  Estimates for their various stimulus programs could reach $10 trillion and they show no signs of backing off any time soon.  They say much of this amount is loans, but much of those loans are to the federal government – so they’re printing money to loan to themselves.  

We throw words like ‘billions’ and ‘trillions’ around like they’re nothing – but think about how big they are.  Counting to a ‘trillion’ by seconds will take almost 32,000 years.  These are massive numbers! 

With all that spending in mind, realize that the government only collects just over $3 trillion in revenue from our taxes.  Our debt was big before, but it’s overwhelming at this point.  This will have a drag on economic growth in the future. 

It also begs the question, if the government can print all this money to fund their spending, why do we pay taxes at all?  If there are no adverse consequences from printing all this money, why not run the government on printed money?  It’s a rhetorical question, but it shows how absurd this whole situation is.

With so much debt around the world, we expect to hear more about debt forgiveness and debt jubilee’s in the coming years.  We believe there are legitimate odds of this happening, as insane as it sounds. 
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Economic data released this month was bad – this shouldn’t be a surprise.  It also won’t be a surprise that data released next month will be even worse. 

The data released this month covered March and the first quarter.  However, the bulk of the shutdown occurred in April, so data including April will be far worse.   

We won’t get into many of the reports released this month – they were all terrible.  We will highlight two main reports though, showing the strength of the overall economy and employment. 

The big report was GDP, showing the strength of the economy in the first quarter.  Again, it was no surprise that it was a negative number.  A 4.8% drop is the worst since the financial crisis.  However, this is tame compared to forecasts for second quarter GDP, which economists have estimated a drop of anywhere between 30-50%! 

The other report we’ll highlight is the weekly jobless claims data, which counts the amount of people who filed for unemployment (it’s seen as a barometer for the job market). 

As you can see in the image below, we’ve seen a sharp spike in people filing for unemployment.  This isn’t surprising when the government forces businesses to close and people to not work. 

However, you can see that the situation is improving.  Though still high, fewer people are filing for unemployment than at the beginning of the month.

While the data from this month is bad and next month will be worse, remember that this is likely the bottom, unless the virus reemerges.  The market is forward looking and the economic data will improve as the country gets back to work.

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Corporate earnings for the first quarter began rolling in this month, too. 

About half the companies in the S&P 500 have reported results so far and earnings are on pace to decline about 15%, but there is a wide disparity in the results as some companies did very well and others very poor. 

Companies that benefit from people staying home have fared the best.  A lot of computer-related companies are profiting as people stay home and use their computers more.  Plus, entertainment companies like Netflix have found a captive audience.  Amazon benefits, too, as people buy things online. 

You also have stores like Wal-Mart, who have remained open and benefitted as people stock up (or horde) items.  Grocery stores, too, have done particularly well as they remained open.

On the other hand, many industries did extremely poorly.  Energy companies have been the hardest hit as fewer people travel and need gas for their cars.  Plus, the places people travel to or on have been hit, like casinos, cruise lines, airlines, etc. 

Remember, though, we appear to be on the rebound from this crisis.  We may see bad data for a while, but the market will continue to rebound as the country gets back to work
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Where does the market go from here? 

We don’t expect to see the returns of this month happen again, but we think the market will continue higher, though at a slower pace.  Several market indicators even show stocks being overbought (or expensive) on a very short-term basis, so we may even see more of a stall. 

The main thing to keep an eye on is the number of virus cases. 

Right now, the amount of new cases seems to have stalled and is slightly receding.  It will be important to keep an eye on this as more states open up.  We’re bound to see the amount of cases tick higher and it will be interesting to see if the states stay open or shut back down.  New shutdowns will send stocks lower. 

There will still be tough times ahead, too.  A wave of bankruptcies is likely and economic data will probably be the worst we’ve ever seen.  There will be plenty of negative headlines that could send the market lower.      

All that said, no one knows where the market will go from here.  The question is, do you see things being better in six months, one year, five years?  We do.  Again, that doesn’t mean it can’t go lower, but we think it’s a good time to be a buyer.  



This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the period ending 3-31-20

Hello all – we’re glad to put March behind us and bet you feel the same.

Unprecedented volatility and panic gripped the markets this month, sending virtually every asset class lower. Stocks again had their worst month since 2008 with the Dow off almost 14%, the S&P losing 12.5%, and the Nasdaq down 11%. 

The month saw two of the top-five largest percentage declines ever for the Dow. 

The volatility in the markets was beyond anything we’ve ever seen.  Take a look at the daily movements of the Dow in March.  Every day had moves of at least 100 points.  We’d also guess the month saw the most 1,000-point swings ever.

It could have been far worse, were it not for a quick rebound late in the month.  Stocks were on pace for their worst month since the Great Depression, having lost 34% from peak-to-trough.  It was the fastest decline on record.

The month-end also marked the end of the first quarter, which was the worst quarter since 2008 and worst first-quarter ever.

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Getting into the month, you all know the news by now.  The economy has essentially been shut down over the past month due to the flu, which has killed an estimated 43,000 this flu season and hospitalized another 565,000. (CDC)

Wait, that doesn’t sound right.

The economy has shut down due to the H1N1 Swine Flu of 2009 that infected 60 million Americans, causing 274,000 hospitalizations and over 12,000 deaths. (CDC)

That doesn’t sound right, either.

No, the economy has been shut down due to the 160,000 cases of the Coronavirus and 2,800 deaths it has caused.  

No amount of lives lost is ever acceptable, but by comparing the Coronavirus to other viruses, we can see the exaggerated panic that has been created over this virus.

We understand the unknown nature and fast spread causes some alarm, but an objective observer can grasp the fact that it is very dangerous to the old and those with pre-existing conditions (99% of the deaths in Italy had pre-existing conditions), but relatively benign to the young and healthy.

We never would have thought it was possible to shut down virtually an entire country – most businesses have been ordered to close their doors and some states have instructed their residents to stay in their homes.  This has left many businesses and workers with no income. 

Interestingly enough, the government forces businesses to close while many state governments still allow situations they benefit from to continue – and furloughed government workers continue to get paid even though workers at many businesses don’t.

Or some states where shutdowns look politically motivated.  For example, Virginia’s Democrat governor issued a stay-at-home order and business closure until June 10th – far beyond the deadline of any other state. 

It’s a curious deadline, especially since it’s a random date on a random weekday.  What is happening June 9th, the day before the shutdown is lifted?  A Republican primary election in that state.  Yet there has been little, if any, pushback over the destruction of people’s livelihoods in what is a blatant political act. 

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In our view, the most difficult part of this situation is the workers who have no income coming in, especially now at the beginning of the month when many rents and bills are due. 

The Fed conducts economic surveys and has regularly found that around 40% of Americans can’t afford an unexpected expense of $400 or more. 

Many businesses are simply laying off their employees since they can’t afford to keep them on board.  Filings for unemployment exploded higher last week and is likely to be just the beginning of many, many more layoffs.  Some economists have predicted that up to 1/3rd of Americans will be unemployed. 

It's hard to imagine how this will resolve itself.  We wonder if the medicine is worse than the disease. 

Economists are also predicting a sharp drop in GDP, which measures the strength of the economy.  Some have even estimated for as much as a 50% drop in GDP next quarter!

We think it’s a virtual certainty we are in what can be labeled as a recession.  A recession is defined as two quarters of GDP declines – we’re almost certainly going to have a negative GDP for the first quarter and very likely to have a negative second quarter (just FYI – a depression is generally defined as a recession of 3+ years – we don’t see that happening).

We say “what can be labeled as a recession” though, because this is unlike any other recession in history.  It’s self-inflicted.  It was not caused by excesses or distortions in the economy like in other recessions.  For this reason, there is the hope that the pain is short-lived and we can rebound quickly.  

On the point of recessions, we’ll note one recession indicator that continues to be accurate.  The yield curve inversion and subsequent steepening has again sniffed out a recession.  An explanation of the yield curve is beyond the scope of this commentary, just understand that it’s seen as a bad sign when it inverts, or goes negative, and then rises quickly. 

As seen in the chart below, recessions always follow when the yield curve (pink line) goes negative.  It briefly went negative over the last few months and sharply rebounded – indicating a recession was near.   

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To help cushion the inevitable decline in the economy and stabilize the markets, the Fed announced a massive stimulus plan, the likes of which we have never seen.

Without getting too far into the details, they basically announced that they will print an unlimited amount of money to buy bonds that will finance the government stimulus bill, lower borrowing costs, and open a lending program to businesses.

For comparison, just in the last week they printed over $1 trillion to buy bonds to stabilize the market – in the last recession in 2008 it took the Fed nine months to print this much money. 

We’re certain these actions will cause problems in the long run, but for now it seems to have stabilized the markets and they have been drifting high as a result. 

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Where does the market go from here? 

As we mentioned above, the stimulus programs seemed to have halted the decline.  However, we think the main thing to keep an eye on now is the number of virus cases.  They seem to be peaking – however, every new announcement gives the market some jitters, so we aren’t out of the woods yet.

While it may be comforting to see the market make a sharp rebound like it did late in the month, many strong rallies can reverse course and continue moving lower, especially in recessionary periods.  There are countless examples throughout history where this has happened. 

The Great Depression is one good example.  The stock market crashed, then rebounded 30% higher, only to reverse course again and move lower for years. 

On the positive side, a good indicator to follow is the level of insider purchases – which is when officers and directors of a company buy their own stock.  Right now, insiders are very active buying their own stock.  The good news is peaks in these levels often come at market bottoms, as you can see in the chart below.

We have been actively nibbling in the markets.  The panic selling has subsided and volatility is lower, which is a positive sign.  Every asset class is extremely oversold, meaning the odds for a move higher are greater than a move lower. 

However, it’s difficult to time the bottom and stocks may very well head lower from here.  There will still be tough times ahead.  A wave of bankruptcies is likely and economic data will probably be the worst we’ve ever seen.  There will be plenty of negative headlines that could send the market lower.      

All that said, no one knows where the market will go from here.  The question is, do you see things being better in six months, one year, five years?  We do.  Again, that doesn’t mean it can’t go lower, but we think it’s a good time to dip your toe in.  



This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the period ending 2-29-20

Hello all – we hope you had a nice February.

We sure are glad to put this month behind us.  A sharp drop late in the month sent the market to levels we first saw in September of 2018.  For the month, the Dow was off 10.5%, the S&P fell a little more than 9%, and the Nasdaq lost 7.6%.  It was the worst month since 2008.

The selloff has been so sharp that it marked the fastest 10% decline on record.

However, investors with a large allocation to bonds have fared better since bonds prices are at or near record highs.  Bond yields are at their lowest level in history, which is really remarkable (bond prices go up when yields go down).

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What’s behind this selloff?  The Coronavirus is the main culprit, but there’s also a couple other factors at play.

Before getting to the Coronavirus, we’ll start with the trading environment. 

The vast majority of trading in the market (like, upwards of 80%) is computerized trading, where algorithms place trades when certain conditions are met (for example – sell when a stock or market hits its 200-day moving average).

All these algorithms (or “algos” as they’re often called) tend to have similar strategies, so when a trigger is met (like the 200-day average example, from above), they all tend to sell.  This exacerbates the problem and causes a larger selloff than we’d ordinarily see.

Also, we can’t underestimate the importance of free trading.  Since it costs nothing to place a trade these days, more and more people are active in the market and the herd effect becomes greater.  Selling begets more selling and it snowballs into a free-fall, like we have just seen. 

We believe these factors have made the drop worse than it otherwise would have been (and you can argue the same circumstances pushed the markets too high, too).      

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As for the Coronavirus, it made its first appearance in January and caused a little rattle in the markets.  As time went on and more cases were reported, the lower the market went. 

It may not be the most severe virus we’ve ever seen, but the reaction has been significant.

Things like business and factory closings will obviously have an impact on the economy, especially by causing disruptions in the supply chain.  How big an effect remains to be seen, but estimates for earnings and economic growth have been sharply reduced.   

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With the forecast for weaker economic growth, there have been more calls for the Fed and other central banks around the world to increase their stimulus. 

In fact, the market is pricing in an 80% chance of four interest rate cuts this year (lower interest rates make it cheaper and easier to borrow money).

We aren’t sure how much an increase in stimulus would help the situation, but it shows how far the central banks have strayed from their original role as lender of last resort. 

This economic downturn isn’t because of a lack of demand, where the Fed would stimulate the economy to make it grow.  Borrowing costs aren’t so high that businesses can’t borrow (interest rates are already at record lows).  The only thing the Fed can do here is give a boost to the stock market, which is far outside their mandate.  And it does nothing to fix the underlying problem.

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Speaking of the Fed, we believe they contributed to the fall in the market, though we have not seen it reported anywhere.

Their stimulus program over the last decade was to print money to buy bonds and cause the markets to rise.  They paused this program in 2015, only to recently restart it last fall – which we believe was a major factor in the market’s rise since then.  The gain since October is clearly visible. 

However, they appear to have stalled the program again.  Their balance sheet has been pretty flat in 2020 and we just had the first two-week decline in their balance sheet. 

We think the rollback in this program has contributed to the market volatility. 

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The last factor in the recent market decline has been the emergence of Bernie Sanders as the frontrunner in the Democrat primary. 

Exactly how large an impact is up for debate, but the fact that the banking and healthcare sectors have fared worse than the broader market during this decline is a sign of his impact (he wants to break up the banks and take over the healthcare industry). 

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We won’t get into the economic data points of the month like we usually do since they are largely irrelevant at this point.  Economic reports were solid overall before the virus appeared, but we can count on the upcoming releases to being sharply lower as a result.   

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Where does the market go from here? 

At present, everything is strongly oversold on a short term basis (meaning they are attractive for investment). When to get in remains the question.  Sharp declines like the one we’ve just had tend to have sharp rebounds, but we aren’t trying to catch a falling knife.  We’d like to see a strong day higher with a lot of volume before dipping a toe in, then add more if conditions warrant. 

As mentioned above, we will hear about lower economic growth and corporate earnings for at least the first quarter and this will contribute to the volatility. 

Remember, though, that the time to buy is when others are fearful. 

A useful contrarian indicator comes from CNBC.  The times when the business channel reports that the “markets are in turmoil” has turned out to be a smart time to buy.  For what it’s worth, they’ve said this every day this week.

 
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for the period ending 1-31-20

Hello all – we hope your new year has gotten off to a good start. 

It was a bit of a mixed picture for the markets as they started the year off strong, but selling late in the month erased the gains.  So far, the S&P 500 has returned exactly… 0.0% for the year.  The Dow is off 0.9%, while the Nasdaq is up 2.0%. 

The selling was triggered during the first reports of the Coronavirus out of China. 

Yes, the virus will put a damper on a lot of economic activity and will have an impact on the global economy.  However, we think the decline in the market was more due to investors looking for an excuse to sell.  The market had been very overbought (or expensive) after the strong run the market has had.  The virus gave investors an opportunity to sell and lock in gains. 

Here’s a look at some of the past epidemics.  The font may be a little small, but you get the idea that any impact on the market is temporary. 

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Aside from the Coronavirus, what was impacting the market this month?

First was the signing of the trade deal.  While it’s not perfect, it is a positive first step in the right direction and better than the status quo. 

The deal isn’t just about the Chinese buying more of our soybeans.  The details haven’t been discussed much (mostly because we didn’t learn about them until late in the process), but the Chinese will be buying a lot more American items.  In return, we gave up nothing.  That’s a pretty good deal. 

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The Fed also had an impact on the market, but to the downside. 

It probably didn’t help that the Fed held their policy meeting this month during the height of the virus concerns.  Their tone was measured, warning that the virus would weigh on global growth and sounding more pessimistic in general.  Markets moved lower as a result.

However, the bad news is often good news from the Fed because it means they will continue to stimulate the economy.  Right now they are printing money to buy bonds, which has helped prop up the market the last several months.  Investors are also predicting the Fed will lower interest rates two times this year, which is another form of stimulus.  These two items are likely to keep stocks elevated for the foreseeable future. 

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Earnings haven’t gotten a lot of attention, but the results for fourth quarter earnings are underway. 

So far, earnings are coming in about where analysts expected, down 2.1% over the past year according to Factset.  It looks like this is the bottom, though, as earnings are forecasted to rise from here. 

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Lastly, economic data this month was mixed, but leaned to the positive side. 

GDP from the fourth quarter came in at a decent 2.1% growth.

Job growth remains solid.

It’s manufacturing that has shown weakness, lower again in December.  However, an update to this manufacturing data was released this morning and showed a return to growth. 

When we combine the manufacturing and service sectors of the economy, the picture looks to be improving, too. 

The consumer side has been particularly strong.  Sentiment indicators show considerable strength. 

Small business optimism ticked slightly lower last month, but it still remains at a fairly high level.

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Where does the market go from here? 

The selloff has put the market near attractive levels.  That doesn’t mean the market can’t keep moving lower, but the odds of a rise are better than a decline. 

As always, unpredictable events like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted.


This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.