The Ecstasy, The Agony and Back
It is hard to believe that only fifty days have passed since the S&P 500 posted a record high of 3393.52. As of this past Thursday the index closed at 2789.82, down 18% on the year and up 28% from its March 23, low of 2191.86. Needless to say, regardless of your market philosophy (bull or bear, long-term investor or trader) this has been an especially trying period for all of us. All of this was brought to us by a black swan by the name of COVID19.
Awaiting Next Shoe
I continue to speak with individuals and professionals who are concerned that we have one more leg down or at least a retest of the lows. What appears to be a universal theme is that they all appear to be waiting for the next bit of bad news, the next shoe, that will force the market into retreat … like how bad will Q2 be for the economy?
Let me suggest at this point that most people and the market know Q2 is going to be awful. I would also throw out the idea that 2020 is going to be a write-off. My sense is that the worst has been priced into the market. So the bad news going forward (negative GDP growth, big jumps in unemployment, awful earnings for some companies, including much red ink) will have little negative effect on the market. The focus will shift to the positive impact of the unprecedented stimulus and monetary policy currently being applied by central banks and governments all around the world.
There is one refrain that I hear, especially from individuals, and that is they are looking for some sort of proof that it is safe to get back in the market … better than expected GDP numbers, employment stats, etc. When the obvious signs appear it will be too late. The opportunities will be lost. The train will have already left the station.
The media and pundits will not be helpful
“J. P. Morgan now forecasts the economy contracting 40% and unemployment reaching 20%–from CNBC.com” (Apr. 9, 2020) Not necessarily new news or unexpected, but the estimate could be high.
“Pelosi says it is unclear when the US economy can reopen–‘We could have a depression’. from CNBC.com (Apr. 9, 2020) I’m a moderate Democrat but boy was that a stupid thing to say.
“Most financial advisors see markets diving lower, survey finds –from CNBC.com” (Apr. 8, 2020) According to the post 8 out of 10 see the market diving lower. This I find most encouraging. This is not to disparage the real professionals that I know in the field.
“Stocks Just Had Their Best Week in Decades. Get Ready For Drop.” Barrons–4/10/2020 (You need a Wall Street Journal or Barron’s subscription to view) …Not an uncommon point of view these days.
Canaries in the coal mine revisited
Gold buying can be a proxy for terror (i.e., the end of the world) or fear of rising inflation. Inflation fear now seems to have trumped terror as the yellow metal made a new 5-year high of $1754.50/oz. Friday, 4/9. It now sits just about $165.00 from its record high of $1917.90 Historically gold is a terrible investment but it can be a great trade from time to time. Meanwhile the other flight-to-fear champ, the 10-year UST note, is continuing to yield .73% in the face of massive central bank demand as they attempt to keep rates low.
The bounce off the lows has been met with significant skepticism. For example the VIX (the ‘fear index’-CBOE volatility index) continues to register above 40, which in normal times would signify significant fear and anxiety in the market. Before COVID came on to the market radar screen this measure was trading between 12 and 15. To give some perspective on this. in the past 5 years there were only a few instances where the VIX traded above 40. These were for short periods. Most of the time the index was below 20 and a lot of that time it was below 15. The VIX peaked at 85.47 on March 28. The previous high (89.53) occurred in the midst of the financial crisis (October 2008).
I saw one source quoted on CNBC comparing this to the financial crisis, pointing out several false starts before the ultimate bottom in March 2009. As I have said before this is in no way similar to the market collapse of 2008/2009. In ’08/’09 we had no idea of the magnitude of the problem we were addressing. TARP was at $700 billon a shot in the dark. We had no idea if it would work. COVID19 will probably be in the rear-view mirror a year from now. Meanwhile, we will have pumped $2.1 trillion (and maybe more) in fiscal stimulus plus, potentially, trillions more from monetary policy into the economy.
In light of what continues to be a ratcheting down of projections (projections that have been way off the mark) on the severity of COVID19 cases, peaks and deaths worldwide, and in the face of massive stimulus it is very difficult to be negative at this juncture.
What’s your take?
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