After a strong three-day rally, stocks gave back some ground Friday afternoon, particularly in the last half hour. Nonetheless, last week’s rally, whether it proves to be the start of the bottoming process or just a mid-bear market relief rally, felt good after weeks of sharp declines.
Over the weekend, there was little in the way of new news. The number of people infected with the Covid-19 virus continued to escalate sharply and threatened to overwhelm healthcare systems. While this was unnerving, it wasn’t beyond the range of expectations. What continues to be disturbing is the lack of equipment and test kits needed to combat the virus effectively. One study, about a week old, rated the 61 most active coronavirus nations by tests per million people. The U.S. came in 61st. If we are going to contain the virus, we need to know who has it, the pattern of spread, and the number of people who have recovered. The media is full of exciting news of new, faster tests, and a concerted effort by corporate America to build more ventilators and masks. But so far, geographies in the most need remain short of almost everything. Hopefully the situation can be alleviated within the next few weeks.
One thing that won’t happen is a grand reopening of our economy on Easter Sunday. No one, other than the President, seriously believed that last week. Markets shouldn’t respond to an announced delay as a market-moving event. Scott Gottlieb, the former head of the FDA, probably gave the best signal when he said steps to open up the economy can’t be taken until about two weeks after the rate of infection peaks. If the peak happens by late April, and it will vary from market to market, then we are looking to mid-May before there is a gradual restart to our economy. And that is the optimistic projection.
Obviously, the impact of the shutdown varies not only by geography, but industry by industry. Restaurants, hotels, theme parks, retail stores and movie theatres have to restart from ground zero. Even when they are allowed to open, it will take weeks or even months for volumes to rebuild. Some stores, despite the aid package passed last week, will remain shut. Other businesses including health care, financial services, essential services (e.g. grocers and pharmacies), streaming companies, and cloud support, will hardly skip a beat. There are many in between. There will be many nuances that impact a whole slew of businesses, that second derivative impact that isn’t intuitively obvious at first. The millions on unemployment will be backed up on bill payments until Federal money flows. Some will fall through the cracks and get nothing. Will the safety nets catch these people or not? These are all unanswered questions that will take weeks to resolve. All the uncertainties will help to keep market volatility high.
The 3-day gain last week set off my two-day rule that allows investors to be a bit more offensive. But after Friday’s losses, should markets fall again today, that all gets negated. At best, the back and forth motion would suggest at least a retest of last week’s lows. At worst, new lows lie ahead. On the other hand, if markets can stabilize early this week, and continue to move higher, it could support the idea that the worst is over. A total retest may never happen.
All this is technical jargon. The real world will dictate the market’s direction. Right now markets are supposing that by early-mid May we will be able to see more clearly some level of normality on the horizon. The levels of new infections will be falling noticeably, at least in key markets. Some steps will be taken to get the economy restarted. All this presupposes some level of economic equilibrium by mid-summer. That may or may not prove true. This is a novel virus with historic precedent. There is a silent contagion period early on that allows the virus to spread both rapidly and undetected. Although tests exist for the presence of antigens, they are not deployed in significant numbers. Thus, at the moment, we can’t seriously map the path of contagion or those who have built immunities. If the U.S. expects to reopen in some capacity before Memorial Day, we need to be able to do so much better than we can do today. Hopefully, that will happen by early summer.
The first quarter ends tomorrow. Economic data we will see in the back half of the week for March will only begin to tell the story. Companies rarely preannounce earnings, only doing so when there is significant deviation from expectations. This quarter, of course, there will be lots of deviation, and one should expect many preannouncements this week and next in front of actual earnings reports. Few will even begin to give a serious picture of second-quarter results. We all know, on a macro basis, that Q2 will be terrible, probably the worst quarter in recent memory. But how bad it may be company-by-company is still only a guess. Some businesses could remain shut, in whole or in part, for much of the quarter. As we digest the news, stocks will adjust. It is hard to see how the economic news to come is likely to be better than expected.
Stock market bottoms are often a process. First, an initial low is set. Hopefully, that has happened over the past two weeks. It will be retested in some manner. For now 2200 on the S&P is that low to be retested. That’s a bit over 10% below Friday’s close. For some stocks, it is more than 20% below Friday’s close, leaving a bit of room for a good retest. Again, it will be the real news that determines whether lows hold. Over the next week or two, if new cases explode beyond expectations or the likely economic damage is much worse than expected, then new lows are likely. If the virus fades and then comes back with a vengeance once people start to come out of quarantine, the lows have not been set. But if virus peaks are in late April to mid-May and there are signs of economic life before Memorial Day, then we could have seen the worst. Whether that is hope or reality will be borne out over the coming weeks.
As investors, there is no real need to make definitive investment decisions today. At 2541, Friday’s close, the S&P 500 trades at 17.5x 2021 estimated earnings. Given today’s interest rates, that is neither extraordinarily cheap nor expensive. To be sure, there are bargains, and there remain stocks that are expensive. But there is little incentive, barring a change in news, to either dive in head first to buy or to sell in a panic. Given the first quarter ends tomorrow, there will be a bit of continued window dressing by funds, meaning that some of the weakest names will see a bit of extra selling today and tomorrow. With that aside, at Friday’s closing price, I can make a case for a 10% move in either direction, depending on the virus-related news over the next few days or weeks.
What one shouldn’t do is assume that the economy will restart as fast as it fell apart, that the last two months have been a bad dream that will simply disappear. Some industries, like cruise ships, may not recover fully for several years. You will read a lot of articles about how the virus will change the way we lead our lives and do business. But my guess is that the fundamental changes will be far less than some of the more drastic suggestions expect. Salesmen will still want to meet customers one-on-one, not via Zoom. Americans will lust to travel overseas when they deem it safe. They will fly again. We aren’t going to avoid the malls come Christmas. We may carry Purell with us more often, and we may be more conscious of those who sneeze around us, but once this virus passes life will get back to normal. It just may take a few more months than we thought a few weeks ago, but there will be an end to this pandemic. In fact, that is the one constant of all pandemics, they eventually end.
Today, Celine Dion is 52. MC Hammer is 58. Eric Clapton turns 75.
James M. Meyer, CFA 610-260-2220