04/08/2020

It is good to be reminded that the stock market can actually rally.  Of the 34 trading days since the S&P reached an all-time high, 29 of these days have seen swings in excess of 1% and 21 of these days have been negative.  In other words, the market has been painfully volatile and mostly negative these past five weeks.  Several recent trading sessions, however, have given us nice rallies and we have regained roughly 15% of the 35% crash.  The markets appear to be stabilizing.

The doomsayers (and there are plenty of them these days) believe we have been experiencing nothing more than a bear market rally and investors can expect more declines in the weeks ahead.  The optimists are focused on the recent wave of government stimulus and believe those investors on the sidelines risk missing out on a supercharged rebound.  The truth is nobody really knows, including us.  Given that we all must choose a path we believe most likely, count us among the optimists.

This great country has never had a recession by proclamation.  In order to fight the COVID-19 outbreak, the government and public health officials have essentially locked down large parts of our economy.  It is as if we have put our economy into a medically induced coma. 

According to recent analysis conducted by The Wall Street Journal, about one-quarter of the U.S. economy has suddenly gone idle amid the coronavirus pandemic.  Forty-one states have ordered at least some “nonessential” businesses to close to reduce the spread of the coronavirus.  This has no precedent and experts are only now beginning to deliberate on how quickly the economy might bounce back once the threat of the virus begins to pass. 

So, the COVID-19 situation has now become a matter of time.  We now realize that this crisis is not The Black Plague of the mid-1300s.  As serious as the health implications of COVID-19 are, we have moved quickly from fearing the worst-case scenarios to seeing the data begin to turn positive.  We expect the data will continue to trend favorably and the next critical step will be the reopening of the economy. 

Business closures will ultimately hurt the demand side of the economy, which in turn will further hinder the recovery.   It may take a long time before we go back to anything like January 2020 normalcy.  We have no idea, even as restaurants, shopping centers, sports arenas, and airlines open, what consumer behavior will look like.  This said, our view is that following many weeks of social distancing and being cooped up at home, people will be eager to reclaim their lives, provided they can feel safe.  With new therapeutics and an eventual vaccine for COVID-19, we believe things will begin to feel normal again inside of 18 to 24 months. 

The markets also appear to be developing a constructive view of the path forward.  Given that equities are anticipatory in nature (i.e. current values represent the net present value of future earnings), recent stabilization likely suggests the markets are beginning to look through the terrible economic news coming our way.  In a typical recession, large imbalances (or bubbles) disrupt the normal flow of things.  This time the global economy is experiencing a shock similar to a natural disaster.  While this implies that the sudden recession and bear market could be deeper, the duration may also be shorter.  

Stocks bottom when you run out of sellers, panic, and margin calls.  Market dynamics appear to be shifting and we believe the worst of the downturn is now behind us.  While we expect a degree of volatility will continue over the near-term, we believe recent lows will hold if retested.  Accordingly, we have started the process of bringing money back into select asset classes.  Our objective is to capitalize on the opportunities created by indiscriminate selling.

This does not mean that we are ready to sound the “all clear” or that we won’t have difficult days ahead.  It does mean the bottoming process, following a panic driven crash, is working as we expected.  There will be more back-and-forth developments and we must remain braced for “worst-ever” economic headlines for weeks or months on end.  We must be disciplined and focused on long-term investment plans.  Being prepared for bad news can help us avoid making behavioral mistakes when those around us are unnerved.   

The Coronavirus Resource Center on our website continues to be our central repository of information and client messaging as we work through this crisis.  Here you will find a wide range of information and commentary related to the challenges we currently face.  The Resource Center also contains third-party materials and will be regularly updated.  Click: CCP / COVID-19.

Last Friday we held a client conference call entitled The Four Corners of a Crisis – Part 1 and the feedback has been quite positive.  Accordingly, we will be hosting a follow-up call tomorrow afternoon (04/09/2020) at 2:00 PM.  This will be a short (30 minute) presentation of the data we are focused on and our current interpretations of the various trends we are seeing.  To register and participate in this call please click here:  The Four Corners of a Crisis – Part 2.  

Stay safe,

John

PS.  The COVID-19 outbreak has impacted every person on some level, and certain families have been dealt a tougher hand than others.  While we have continuously reached out to our friends and clients over the past few weeks, we recognize we have not yet connected with everyone.  Moreover, this crisis remains very fluid day-to-day.  This said, I want to pause for an important wellness check.  If you or a loved one have been diagnosed with the virus, have experienced job loss or an interruption of income, or are having trouble obtaining essential food and supplies, please let us know.  We want to direct our attention and resources where they may be most needed.  And, we very much want to help.