The COVID-19 virus (Coronavirus) and the economic damage from it coupled with an already slowing global economy has now fully been expressed in the stock market, commodity prices, and interest rates. It is painful for all concerned. It’s also important we accept there will be significant economic damage in the short term. However, with the mass closings and “social distancing” being the normal now, the risks of the virus spreading out of control seems removed as a major risk. Time will tell. The slow-moving politicians are finally getting in gear and building some major policy responses to calm fears and stabilize sentiment and business finances.
The Federal Reserve (Fed) has announced that they will pump more than $500 billion into short-term bank funding and will expand types of securities purchases. The situation is fluid and we are likely to have steady and enormous liquidity injections for the foreseeable future. As more businesses cancel short-term plans, the liquidity available to them will help bridge the gap between now and when business gets back to normal. I expect the Fed to buy more than $1 trillion in securities via repo operations to help stabilize markets and ensure ample liquidity is available to corporations. That’s the first bazooka to be fired. Over the coming days we should see more fiscal responses by the government that could include a tax holiday and added monetary relief for consumers and businesses.
But rather than guess about the trajectory of events over the next four months, I’ll just say it will be fluid, change wildly, but in the end, we will contain the virus, stabilize financial markets, and eventually get back to normal life and consumption. Nothing is more predictable than a consumer’s propensity to spend. They can keep us in our houses for only so long. I don’t know about you but we have ordered more of what we want and need via Amazon so there are companies that are benefitting from the current change in consumption. In fact, I’ve asked three Amazon delivery drivers over the last three days how they would describe their activity and they all said, “it’s Christmas busy, crazy busy”. Consumers will not shut down; they will just change their spending behavior. When this thing stabilizes, the stock market will positively adjust for the “end of days” narrative. The moves back based on “it’s now as bad as it gets” will be breathe-taking.
The year 1987 is the only comparison we have now, so I thought it was good to post today’s comments from Hedgeye Institutional Research, they have been spot-on with their economic analysis. In my view, the year 1987 is the only analog for what we see today.
That’s all water under the high-water mark bridge at this point. Here are three things we think you need to know to help risk manage the path forward:
- We’re going to have at least two months of negative revisions to consensus growth expectations from here, just based on the cadence of MAR/APR high-frequency economic data.
- 1987 is the best analog to contextualize the mounting economic risks associated with the now-popped bubble in equities. Recall that the S&P 500 rallied +59.4% from the start of 1986 through the 8/25/87 closing high in the face of a persistent corporate profit recession throughout. That’s not unlike the market move we’ve seen off the December 2018 lows in the face of slowing GDP and EPS growth off their respective 3Q 2018 cycle-peaks.
- 1987 is also the best market analog in terms of how to proactively prepare for the most probable path forward. If we assume this past Monday’s -7.6% decline in the S&P 500 to be akin to Black Monday’s -20.5% decline, then we should then anticipate a short-term bounce on policy speculation (+15.9% 10/19/87-10/21/87 vs. +4.9% 3/10/20), followed by a ~6 week decline of greater than 10% to the ultimate lows (-13.3% 10/21/87-12/4/87). Having been born in March of that year, I learned yesterday that Black Monday was not the investable bottom of that market cycle. Yes, the 12/4/87 bottom was only -0.4% from that Black Monday low, but investors should beware that the SPY corrected a full -10.1% during the final month of that market event.
Despite the current worries about the Coronavirus, here are some bottom-line points to keep in mind:
- Uncertainty everywhere is at extreme levels.
- Corporations and businesses are taking extreme measures to try and contain the spread of the virus. That will ultimately help this thing to be contained.
- The market is pricing in the worst-case scenario so anything less than that will be rewarded with enormous equity gains.
- In January and early February, things seemed wonderful and it turned out to be the worst time to buy stocks. Now it seems as bad as it has been in decades. The truth always lies somewhere in the middle. Stay calm, be opportunistic in the most high-quality companies that have fortress balance sheets.
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed.