The market continues to search for a bottom and some semblance of normalcy. Although the volatility index is down 40% from its highs, it is still well above every other peak for the past 25+ years outside of the housing bust. Whipsaws back and forth will continue. As the daily Covid-19 counts trek higher, investors have to grapple with the length of the slowdown and the long-term implications. Many are throwing 2020 data points out the window as near term earnings mean little to long-term investors. Looking forward, the 2021 expectations are dependent upon us getting back to work in as normal a fashion as possible. It will be welcomed news when the new virus counts peak, which is expected over the coming days and weeks.
The first quarter is in the books. The next two will look nothing like we have ever seen and backward looking data is a lot of “what could have been”. Most of the earnings reports we have already seen were handily above estimates for February month-end updates. Revenues were expanding and the impact of lower rates were cycling through the economy. This pandemic really halted what was shaping up to be another banner year in the stock market.
Some pertinent data as we look back (many thanks to Tower Bridge’s Chad Imgrund for the detail below):
- March set a monthly record for volatility with an average daily move of 4.8%, a truly staggering number.
- The S&P 500 posted a negative 19.5% total return. Technology, Healthcare, Consumer Staples and Utilities sectors were leaders but all posted double digit declines.
- The Russell 2000, which returned -30.9% in Q1, posted the largest quarterly loss in the history of the index. The trailing 5-year annualized return for the Russell 2000 was -0.2% in March; a negative 5-year annualized return has occurred on less than 5% of month-end dates in the 40+ year history of the index.
- Growth stocks far outperformed value stocks, as investors sought refuge in companies with business models that can survive, and even thrive, in and through the virus crisis. The contrast is stunning: the Nasdaq 100 shed “only” -10.5% of its value in Q1; the Nasdaq Composite -14.2%; and the S&P 500 Growth index -14.8%. Meanwhile, the S&P 500 Value index posted a -25.9% return in the quarter.
- Typically, when stocks are down this much one would expect solid returns from their fixed income investments. Once liquidity dried up as investors sold everything to raise cash, corporate and muni bond prices were held back. The overall returns were slightly positive. As the Federal Reserve infuses stability, we expect this area to bounce back sooner rather than later and bond prices to normalize in investment grade balance sheet issuers.
Records were broken as the world grappled with an unprecedented forced shutdown in many industries. Fiscal and monetary support will help. Hopefully, by the end of the second quarter we are talking about recovery records and massive gains, but much work needs to be done to get there. The longer everyone works from home and can’t visit their local small business, the longer the road to recovery becomes.
Small businesses can begin applying for loans/grants today. The shotgun approach is helping but needs to be more coordinated to the ones truly in need. Many will apply for the grants, some who weren’t overly affected. Phase 4, in the form of money printing, is already being discussed. This will, hopefully, contain more specific targeting. It was crucial to get the first ~$2.4 Trillion out the door as quick as possible. The next chunk is leaning towards stimulus as opposed to aid. Many expect an infrastructure bill. We’ve all heard that before. It is tough to see that happening anytime soon as D.C is not back in session until April 20th.
It is clear we will be in a recession for at least two quarters. After that is anyone’s guess. Upcoming earnings reports will offer some clarity, but even business owners do not have all the answers. Let’s focus on some random items that we have come across over the past few days that may be of interest:
- The FDA notes that 88% of active pharmaceutical ingredient manufacturing sites and 63% of sites making finished goods are located outside the US. This is certainly going to change going forward, possibly enforced by national security measures. That does not bode well for manufacturing costs and the industry is already facing Governmental pricing pressure.
- There are 267 Coronavirus trials ongoing already. We will beat this. Although vaccines usually take at least 18 – 24 months to get approved, there is hope the red-tape can be reduced. Other treatments are showing positive signs as well. A win here alleviates a lot of fear so we can get back to normal.
- The world produces somewhere in the area of 100 million barrels of oil per day. My gas tank has been on full for a week now. We are producing an excess of at least 15 million barrels every passing day. The storage bins are filling up. The Russia + Saudi battle is hurting everyone, except consumers. Something needs to budge here. We are getting signs that time is near with an expected output cut deal next week. Oil stocks can get a pop but hardly look like great long-term investments.
- The S&P has a dividend yield of 2.5% on current numbers. These are not going to stick. Many have already announced cuts or suspensions. The true yield will be something in the 2.1% range. Investors should be keen to focus on clean balance sheets and those who don’t need to raise debt just to function.
- March 16th was the low point for this bear market, when 85% of the stocks in the index made new 20-day lows at that point. Wednesday’s massive drop only showed 2% of stocks making similar lows. The market indexes can make new lows, but we are optimistic that the average stock has seen the worst of this. Those metrics need to hold for investors to gain more confidence.
- An amazing number, the domestic box office only grossed $5,200 two weeks ago. This rounds to a 100% drop!
- TSA checkpoint screenings are down over 90%+ YoY. Airlines are in deep trouble as many consumers will not want to fly for quite some time. The 6-foot social distancing mantra is difficult with seats on top of each other.
- Over the past eight months, there have been 269 stimulus measures announced around the world (according to Evercore ISI). This is massive. The quicker we can get back to normal life, the quicker these funds start being spent. The money printing machines will help bring economies back to life. The long-term implications are unknown but likely negative. However, if every nation prints, technically we’re on the same level again. This means the US Dollar can remain the reserve currency of choice.
- The Presidential election has taken a backseat in the headlines for now. Biden has been relatively quiet while Trump takes all the free press he can get from daily briefings on the virus. How this all ends will be critical for voters. Currently, most polls show a 60% approval rating for Trump’s handling of the crisis. Similar to war times, people surround their feelings with the incumbent. A quicker than expected end to this shutdown and an economic recovery would be a boon to his re-election efforts and vice versa.
- Last week’s record jobless claims figure of 3.2 million was more than doubled to 6.6 million this week! Kudos to the processors at the State level for getting this many applications completed. This also means nearly 10 million people will be getting unemployment checks quicker than many imagined.
At the end of the day, the real number that matters most is the end date for these suggested quarantines. Earnings, surveys and economic releases are going to be bad. That is well known and can cause daily fluctuations. The main data point to get us there remains the number of new cases. When that peaks and cases start to decline, we will be past the heart of the infection concerns. Other countries show a quick decline and a slow rolling re-opening of their economies. When that occurs, we’ll start getting data points that matter and hopefully our favorite small business owners survive.
Comedian Eddie Murphy turns 59 today and actor Alec Baldwin is 62.
James Vogt, 610-260-2214