Dear Valued Client,
As promised in our last letter, we are touching base again to provide an update concerning our investment strategy and market outlook. We will continue to provide updates as we make our way through the second quarter of 2020.
Since our last letter, we have been closely monitoring a number of items concerning the economy, stock market, as well as the COVID-19 outbreak. We have seen several encouraging improvements, although we continue to monitor the majority of items on our list. As the first quarter of 2020 has drawn to its close, the Dow Jones Industrial Average saw its worst-ever first quarter to begin a year, finishing at 21,917 points and down more than 23% since the beginning of the year (CNBC, 2020). However, the Dow finished the quarter well off of its 18,213 point, March 23rd low (Morningstar DJ Industrial Average, 2020). We have listed several updates below concerning items we continue to monitor.
New U.S. COVID-19 Cases
While new cases of Coronavirus are still increasing in the U.S. (United States Coronavirus Cases, 2020), there are promising signs coming out of Italy. Italy’s daily new cases have remained below 6,557 reported on March 21, 2020. Italy’s March 30th new cases figure of 4,050 is encouraging--38% below the previous high. If Italian new cases continue to fall, the peak will have occurred 43 days from their first case (Italy Coronavirus Cases, 2020 ). 43 days is also approximately the same length it took South Korea to reach its new daily cases apex (South Korea Coronavirus Cases, 2020). If U.S., new COVID-19 cases are lagging Italy by 14 days, we could potentially see new cases in the U.S. begin to decline in the coming days.
Fiscal Policy from Congress
The U.S. government has begun stepping up aid to businesses and individuals. Congress passed a $2 trillion stimulus plan in an effort to rescue the ailing economy from Coronavirus. The plan provides businesses with access to emergency loans, tax breaks for individuals and business entities, as well as direct payments to Americans. However, BlackRock Inc. CEO Larry Fink thinks another round of stimulus will be needed (Bloomberg Markets, 2020). In fact according to Bloomberg, a fourth stimulus package is currently being prepped by the White House and Congressional Democrats. These proposals include increased state aid, as well as continued financial assistance for mortgage markets and travel industries. Nancy Pelosi indicated there may be further direct payments to individuals (Bloomberg Politics, 2020).
Investor Sentiment- Once Markets Stop Declining on Bad News, this may Indicate Selling has Dried Up
On March 26th, the release of weekly initial jobless claims revealed a staggering 3.3 million new unemployment claims, up from 282,000 the week prior. To provide context, the U.S. has never seen a reading above 700,000. Despite the enormous increase in jobless claims, the stock market rose sharply with the Dow finishing up 6.3% that day (Morningstar Global News Select, 2020). Equity markets’ positive response to the negative news could be signaling that selling has started to dry up. This could also be a signal that many potential negative outcomes could already be priced into current stock prices. Another example of bad news being met without an equity selloff occurred on March 30th. The Dallas Federal Reserve Bank revealed in a survey that Texas manufacturing output, as well as new orders in March hit contractionary levels not seen since the Great Recession of 2009 (Texas Manufacturing Outlook Survey, 2020). We expect more bad economic news as we move closer to our peak in new, U.S. COVID-19 cases. However, we will continue to examine how markets react upon hearing the anticipated bad news.
Coronavirus Testing & Treatment
The reality remains that we have yet to determine the exact arch and breadth of COVID-19’s spread. However, testing capacity in the U.S is beginning to ramp up, and nationwide social-distancing practices (while painful to the U.S. economy) have helped slow the spread, in our opinion. New York City new cases have decreased daily since March 24th (New York City Health COVID-19 Data, 2020), while the World Health Organization has indicated that they expect European new cases to begin stabilizing soon (Bloomberg Coronavirus Prognosis, 2020).
Abbott Laboratories has received “Emergency Use Authorization” from the FDA to manufacture a Coronavirus test that gives results in 5 minutes. The test could be coming to health care providers as early as the first week of April, and experts say it could be “game-changing.” The company intends to immediately ramp up manufacturing to fill 50,000 tests per day moving forward (Yahoo Finance, 2020).
There are also several treatments we are watching, as well as many trials that are being completed. To provide a temporary solution while potential treatments undergo clinical studies, the FDA has issued a number of emergency-use authorizations for diagnostic tests and medical devices including ventilators.
The FDA’s decision on March 29th to grant an “Emergency Use Authorization” of chloroquine-based products represented the first time the FDA has used its emergency powers to expand access to a drug during the COVID-19 pandemic (Forbes Breaking News, 2020).
Ultimately, until a vaccine is developed or new cases drop significantly, social-distancing policies will likely remain in force and the policies’ economic impacts will be felt. However, there appears to be some progress on the vaccine front. Johnson & Johnson announced a potential vaccine candidate that could be available as early as next year if testing trials go well. The U.S. government has invested $1 billion in this vaccine’s development and human testing is expected to begin by September of 2020.
Johnson & Johnson’s vaccine still remains well behind Moderna’s vaccine candidate. The Boston-based company, Moderna, has a vaccine that is moving quickly through testing—which entered human trials in early March (Financial Times Coronavirus, 2020).
China’s Economy and Markets
As businesses begin to reopen in China, the country is seeing a sharp rebound in economic activity. In a March 26th report compiled by Aiden Research, they indicate that Chinese economic activities have resumed and are expected to fully recover by mid-April. According to data provided by the Research Center for the Chinese Economy based in the City University of Hong Kong, they have access to real-time GPS data from two million Chinese trucks. These trucks account for nearly 10% of all trucks operating in China. By mid-March, truck flows have resumed to 70%-80% of the normal level for the non-Wuhan areas, indicating a good resumption of economic activities as people gradually returned to work (Coronavirus Update: China, 2020).
Although we remain skeptical of state-provided Chinese economic data, we have seen several other encouraging figures. Per a March 31st MarketWatch article, “’The Caixin China manufacturing purchasing managers index, which is tilted toward small, private manufacturers, rose to 50.1 in March from 40.3 in February’, Caixin Media Co. and research firm Markit said Wednesday. The March result is just above the 50 mark, which separates contraction from expansion.”
The article goes on to say, “’China's official manufacturing PMI, which focuses more on large, state-owned firms, jumped to 52.0 in March from a record low of 35.7 in February’, the National Bureau of Statistics said Tuesday”, (MarketWatch Asia Markets, 2020). This report provides further suggestion that the Chinese economy is recovering and doing so quickly. We feel this may provide an indication of the U.S. economy’s ability to recover after reaching peak case numbers.
Areas of Interest
We will continue to provide details concerning our other areas of interest as new information becomes available. As reminder, here are some of the other areas we continue to monitor:
- Duration and Rollback of U.S. International Travel Restrictions
- Data Indicating a U.S. Recession
- Consumer Confidence
- Saudi Arabia & Russia Oil Progress
- Insider Buying of U.S. Equities
- Equity and Bond Market Liquidity
For now, our best advice for long-term investors would be to stay the course. Depending upon your unique situation, long-term investors should possibly consider adding equities to ensure their investment allocation stays in line with their long-term target. However, for clients who have given us discretionary authority to maintain their investments, we will automatically make these changes.
For clients who hold bonds in our discretionary portfolios, you may have noticed a recent sale of U.S. government bond ETFs. We chose to remove these funds because of their relatively low-yields, as well as limited up-side potential, in our opinion. We have moved the respective funds to a money market investment in the meantime. However, we intend to move the funds again once when we feel we have located fixed income offering(s) with a more compelling risk-reward tradeoff.
Until more evidence appears that COVID-19 containment efforts are working and that federal policy responses will be sufficient to restore investor confidence, we believe that continued caution is warranted. We remain confident that we will eventually get through these difficult times.
We will continue to keep you updated regarding our views of the economy and markets as this challenging situation develops. We wish you safety and wellness and encourage you to call us with any questions.
All of the Best,
Dustin Padgett and Your Team at Big Sioux Wealth Management