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%.
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.
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.
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.
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.
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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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.
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.
