In the depression of 1929 – 1933, it is interesting to note from peak to the absolute bottom, the Dow fell 83% over a period of 33 months. During the decline, the market experienced eight rallies of 24%, luring investors into thinking the worse was over before the bottom was finally reached. In this past holiday-shortened week, markets rallied globally with the S&P 500 recording its biggest gain in 45 years. In the past two weeks, the S&P has gained over 20%, which generally would suggest we have entered a new bull phase. We don’t think that is the case, at least for the moment.
This week, hopes were raised as infection growth rates in Spain and Italy declined and New York hospitals received the necessary equipment and beds to handle new cases. Additionally, during the week, the Fed announced another stimulus package for small businesses having under 500 employees. Unfortunately, oil declined last week after the optimism from the previous week came under pressure as talks stalled with Mexico’s unwillingness to accept production cuts. On Sunday evening, a production cut of 9.7 million barrels per day was announced, signaling willingness by some of the most significant players to address the supply glut in a world where demand has fallen by 36 million barrels per day. Many think this will not be enough given the discrepancy between the cut and lack of demand and expect the price to fall from current levels back to the $20.00 level before this is over.
As mentioned in past posts, until the coronavirus infection growth rates are on the decline, we do not think any market rallies will be sustainable. The containment policies seem to be working; however, now there is a fear that if economic activity returns too soon, the outbreak will resume, and many more will be infected, resulting in additional unnecessary deaths. The debate centers on when to re-open the economy. This week it was reported in the National Post that Premier Trudeau announced that he did not see the economy back to “normal” until a vaccine was discovered, and that might be 12 to 18 months. We wonder what “normal” might look like, but more importantly, what happens between now and then? The other side of the debate was voiced this week by Michael Burry in several tweets where he suggested country lockdowns were unjustifiable. For those of you not familiar with Michael Burry, he was the first of the three hedge fund managers documented in Michael Lewis’s book, the “Big Short.” He was a medical doctor graduating from Vanderbilt School of Medicine turned hedge fund manager after founding Scion Capital. When he discovered that the housing market was based on subprime loans, which were, in his opinion, extremely risky and unstable, he shorted the loans assuming that at some point, borrowers would not be able to pay the interest when the mortgage interest rates were re-set. He was proven correct and made enormous amounts of money for his investors, paid them out, and closed his fund. This past week it was reported that he said, “government-enforced lockdowns and business shut-downs may trigger one of the countries deepest ever economic contractions and are not necessary to contain the pandemic.” As investors, the reason this debate becomes so important is the impact on the consumer, the primary driver of economic activity. We have no idea when and how the economy will be re-started, the damage done to the consumer’s balance sheet, and how long it will take to resume normal conditions.
First-quarter corporate earnings announcements will start this week. The earnings for Q1 will be significantly lower than estimated at the beginning of the year, but Q2 could very well be even worse as the lockdown continues. Corporate guidance may give some indication of the damage done to the economy and expectations for beyond Q2. The US Labor Department reported another week of record unemployment filings. The contraction in the labor market is unprecedented, with over 17 million jobs lost since mid-March, not total lost, just in two weeks in March.
While the coronavirus containment may be working, there still seems to be a way to go before the virus is under control. Fiscal and monetary policies are accommodative, but without jobs, the economy will grind to a halt as consumer’s spending stalls for everything but essentials. We continue to think it is too early to jump back into this market other than to be very selective in areas least impacted by the virus and strategies proven to have a low correlation to this latest market contraction.
Warren Gerow is an independent consultant to Sightline Wealth Management.
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