We feel the markets have now gone through their initial de-risking and deleveraging phase. The S&P 500 fell 33.9% from February 19th to March 23rd amidst the worsening of the corona-virus epidemic . As of market close April 7, 2020, the S&P 500 now sits at 2,659 points which is nearly 22% below its February 19th highs. As many companies and investors have deleveraged their financial positions, massive stimulus measures were taken by both the Federal Reserve and Congress. Despite the steep selloff and federal action, we are beginning to see tentative signs that the corona-virus spread may be slowing .
“Investors chose to accentuate the positives, as they have been mostly doing since the bear-market low,” said Ed Yardeni, president and chief investment strategist at Yardeni Research in a note to clients. “In our opinion, we are in the midst of a Great Re-balancing away from bonds and into stocks. The bear market has most likely discounted a depression-like recession packed into the Q2 and Q3,” Yardeni also noted. “It certainly hasn’t discounted the possibility of an actual apocalyptic depression lasting through at least 2021 and beyond. On the contrary, the market’s recent action suggests that investors are betting on an economic recovery start during Q4 and continuing through 2021 .”
We believe the market has been reacting to the fiscal and monetary responses which are historic in nature and also an indication of the flattening of the COVID-19 curve. In the near future, we feel investors will begin to shift their focus back to company earnings. However, until we know when workers will return to work, it is almost impossible to predict earnings and GDP. Analysts at Deutsche Bank recently released an estimate of when U.S. business will get back to normal. Their model is largely driven by China’s corona virus timeline. Based on Hubei’s experience, Deutsche Bank’s analysts believe the U.S. and Germany may start to lift restrictions around May 22 . Based on the fact that the U.S. is now armed with better information, we are hopeful that restrictions may be lifted prior to this date.
Over my 20 years in the industry I have never seen GDP and unemployment predictions vary to the degree strategists and economists are predicting. Predicting the severity and length of the virus’ impact upon the economy is difficult because the U.S.’s economic shutdown is largely unprecedented. Never before have major economies been deliberately halted to address a health crisis and attempt to slow the spread so that health care systems are not overwhelmed with patients. One prediction we are comfortable making is that the depth of the recession will be on the list as one of the worst in history. However, if the recession is relatively short in duration, we are hopeful a massive recovery will ensue once everything goes back to normal. The next phase of the corona-virus epidemic will play out in the real economy through continued supply and demand shocks.
As more economic data is released over the next month, we hope to have a more concrete idea as to the speed of the expected recovery.
The common question investors continue to ask is “has the stock market already priced in the upcoming slowdown in the economy?” This is difficult to answer, especially considering that stock market forecasts are at the most polarizing point I have seen since the years surrounding the Great Recession. While strategists at companies such as JP Morgan Chase & Co. have concluded that most risk assets have seen their low points , others at firms like Deutsche Bank AG say it is far too early to sound the all-clear . David Kostin, Goldman Sachs Group Inc.’s chief U.S equity strategist said that the S&P 500 could fall as low as 2,000 but then rally to end the year around 3,000 . While Morgan Stanley’s chief U.S. equity strategist, Mike Wilson, was noted saying that for stocks and investors the worst is behind us .
One particular outlook we find compelling is from Fundstrat’s Tom Lee. He was on CNBC April 7th and offered several interesting remarks. His view is that if the S&P 500 were to make it back to 2,793, the recent market low seen on March 23 would indeed be the bottom of the selloff. If we fail to reach 2,793 points, he predicts that we will then go on to test March’s lows and possibly fall further. The S&P 500 has yet to reach 2,793 since setting its selloff low on March 23. The 2,793 mark is significant because it represents a 50% recovery of selloff losses. Lee theorizes that in bear markets, when the market has recouped more than 50% of its losses, the market will generally go on to make new highs without falling below its initial bottom. If Lee’s theory is correct and we can exceed the 2,793 level, we may be on our way to a recovery and potentially new market highs. The image below displays how previous bear markets such as 1987, 2002, and 2008-2009 have followed his theory .
Of course no one knows for sure, but I remain positive we have seen the worst of the decline. We are certainly not out of the woods yet and the recovery will take time, but I am choosing to look at the glass half full. The virus will end, the markets will rebound, and life will return to normal. Hang in there, be patient, and together we will make it through.