S&P 500 Weekly Update: The Bears Remain In Control
“There are no relationships or equations that always work. Know thyself and know thy foibles, and make sure your facts are right.” – Barton Biggs
Fundamentals, fundamentals, fundamentals. Some investors use nothing but fundamental analysis to form their investment strategy. These days most analysts and investors are obsessed with the only fundamental datapoint that they feel is reliable for them to use today. The daily count on the number of virus cases and the death toll associated with this event.
I realize it is repetitive but it is necessary to get the message across:
“Given the fact that by our nature we will tend to take an event and extrapolate that to the worst case, we should know by now that is something that MUST be avoided when dealing with the markets. One could also say that is also needed in everyday life. It is best to keep any situation balanced.”
However, there are times when we also have to recognize who is controlling the price action. Let there be no doubt the crowd with the loudest emotional outbursts have overtaken the investment scene. As I listen to passionate investor sentiment regarding the Coronavirus issue it may be necessary to perform exorcisms on many folks that have let emotion rule their strategy. Unfortunately, that may not prove enough to bring them back to an even keel perspective. Let there be no doubt that sentiment affects everyone whether they are involved in the investment world or not. It’s a “panicdemic”.
Up until this past Monday, investors found the markets in sort of a post-panic relief mode. During the week ending March 27th, the 10+% rally in the S&P 500 was the largest one-week gain for the index since March 2009 and just the 17th such weekly gain of over 10% for the index since 1928. Bespoke Investment Group:
“Every prior occurrence happened either during the Great Depression or during or at the end of major bear markets. Although short term returns following 10%+ weekly gains have been mixed relative to historical averages, performance six and twelve months out has been significantly stronger than average.”
With the S&P dropping to a BEAR market low down 34% off the highs on Monday, March 23rd, the message last week was one that highlighted BALANCE.
“Whether an investor finds themselves bearish, bullish, or undecided, it never pays to get too stretched in any one direction.
I still feel that way today, a balanced approach is necessary. Each investor has a personal situation to consider before they embark on the journey in navigating this BEAR market.
If you didn’t get your postcard, here is a copy from the bunker of Mr. Bill Kort. He astutely reminds all of us that the emotional outbursts we are witnessing now are not our friend.
The first quarter of the year is in the books. Looking at U.S. equity index ETFs at the end of March, the S&P 500 was down 12.4% on the month, 23.3% since the February 19th all-time high, and 19.4% year-to-date. The Dow 30 was down slightly more than S&P over all three of those time frames, while the Tech-heavy Nasdaq 100 was down much less in both March (-7.3%) and in the first quarter (-10.3%).
Small-caps and mid-caps have both been hit harder than large-caps, while growth outperformed value by a wide margin.
“In the history of the index since 1928, it was just the 9th quarter that has seen a drop of 20%, and it was the first since Q4 2008 when the S&P fell 22.5%. Since WW2, it was just the 5th quarterly drop of 20% or more. Notably, in the six months and twelve months following the prior four quarterly drops of 20%+ since 1945, the S&P was higher every time. Over the next year, the index was higher by 10% or more every time.”
“Below is a table showing all 15%+ quarterly drops for the S&P 500 since WW2. As shown, the S&P was higher in the following quarter 7 of 8 times for an average gain of 5.01%. Over the next two quarters, the S&P was higher every single time for an average gain of 12.66%. And over the next year, the index was higher 7 of 8 times for an average gain of 16.64%.”
Despite those uplifting statistics, there are plenty of concerns that will be with investors for a while in 2020. Those concerns are reminders we shouldn’t be lulled into a sense of false security this early in the market’s rebound.
The S&P 500 rallied 19% off the low. Just remember, the 1973/‘74 BEAR saw a 20% bounce. The 2001/’02 BEAR had 22%, 25%, 24%, and 23% rallies before ultimately falling 51%.
While the 2008/‘09 BEAR saw a 27% rally before falling 56%.
Maintaining BALANCE with an open mind to ALL data and ALL possibilities will be the best way to navigate the markets.
Outside of the US, the hardest-hit country ETFs in both March and the first quarter was Brazil (EWZ) and Mexico (EWW). Brazil was down 38.6% in March and 50% in the first quarter. Mexico was down 31.9% in March and 37% in Q1. China has suffered the least pain, down 9.3% in March, and -12.6% for the year.
The weekend news leading up to the start of the trading week was highlighted by the announcement that President Trump extended the social distancing guidelines to April 30th. Not exactly the type of news that would make us feel we were at the end of this virus-induced disaster. With the “Stay at Home” edict extended to the end of April, the odds that stocks could rally seemed low.
However, the major indices did just that. As the market adjusts to the economic environment we will slowly see prices stabilize as they start to absorb the negative headlines. That would be telling us it has discounted a lot of the negatives from this first shockwave. I expect that to be a long-drawn-out process as investors remain very nervous. Both the S&P and Dow 30 rallied 3.2% on the day.
Turnaround Tuesday and the last day of trading for Q1 saw The Dow and S&P each gave back half of the prior day’s gain as technicians noted the S&P failed at an important resistance level.
Another freefall was ushered in on Wednesday, as pundits ran with the Coronavirus medical briefing that suggested 140- 240,000 Americans could die from the virus. Since that was down from the original 1-2 Million, I dismissed that notion entirely. Plain and simple the BEAR market rally failed at resistance. Once the index was turned back, the path of least resistance was to the downside. The S&P and Dow 30 gapped lower at the start, never rallied and closed down 4+% on the day.
Emotions were quelled and similar to what occurred when we heard that 3 million filed unemployment claims in the prior week, this week’s 6 million claims number sparked a 1.6% rally in the S&P. The typical Friday pattern of price weakness held again with the S&P 500 giving back just about all of the gain on Thursday (-1.5%). For the week the index was down a total of 2% and is now down 23% on the year.
The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index posted 48.5 in March, revised down from the ‘flash’ figure of 49.2, and lower than 50.7 registered in February. The overall deterioration in the health of the manufacturing sector was the fastest since August 2009 but was buoyed by a marked decline in vendor performance (usually a sign of strengthening demand conditions but currently reflecting widespread supply shortages linked to the COVID-19 pandemic).
Chris Williamson, Chief Business Economist:
“The final PMI data for March are even worse than the initial flash estimate, with manufacturing output slumping to the greatest extent since the height of the global financial crisis in 2009. Growing numbers of company closures and lockdowns as the nation fights the COVID-19 outbreak mean business levels have collapsed. While some producers reported being busier as a result of stockpiling and anti-virus activities, notably in the food and healthcare sectors, these are very much the minority, and most sectors reported a rapid deterioration in demand and production.”
“Orders for capital equipment have deteriorated at a rate not seen since data were first available in 2009 as firms stopped investing in machinery. Companies have meanwhile reined-in spending on inputs and households have pulled back sharply on many forms of spending, especially for non-essential and big-ticket items. With export sales also sliding, factories are facing a broad-based slide in demand which is already resulting in the largest job losses recorded since the global financial crisis. Worse is likely to come as consumer spending falls further in the coming months as lockdowns intensify and unemployment spikes higher.”
The seasonally adjusted final IHS Markit US Services Business Activity Index registered 39.8 at the end of the first quarter, which, although revised up from the ‘flash’ figure of 39.1, was down sharply from 49.4 in February. The latest data, collected between 12th and 27th March, indicated the quickest decline in output since data collection began in October 2009. Business activity fell markedly following a sharp reduction in new orders, largely stemming from the outbreak of COVID-19.
Chris Williamson, Chief Business Economist:
“Business activity slumped to the greatest extent for more than a decade in March as efforts to contain the spread of the COVID-19 pandemic intensified. The survey indicates that the economy contracted an annualised rate approaching 5% in March, but with more measures to fight the virus outbreak being taken this decline will likely be eclipsed by what we see in the second quarter. More nonessential businesses are being forced to close, some are going bust, and lockdowns are leading to vastly reduced consumer spending.”
“Employment and prices charged for goods and services are already being slashed at rates not seen since 2009 as companies seek to aggressively cut costs and discount charges in the face of collapsing revenues. Given that the survey does not include the self-employed, the jobless numbers are likely to rise at a much faster rate than even the slide in the PMI indicates. The policy response to the economic damage from the virus has already been unprecedented, but the collapse in business expectations for the year ahead tells us that companies are expecting far worse to come. IHS Markit is now forecasting an around 5.5% contraction of US GDP in 2020.”
The U.S. ISM survey proved remarkably resilient in March, with a modest drop to 49.1 from 50.1 in February, leaving the index still above the 4-year low of 47.8 in December. The ISM had spent two months above 50 in January and February, following a 5-month string of sub-50 readings. Analysts have yet to see if April’s drop will challenge the 34.5 recession-low in December of 2008.
U.S. construction spending report revealed an unexpected -1.3% February drop, though this followed upward revisions in December and January that left a mixed report overall. The January construction gain was revised up sharply to 2.8% from 1.8%, and December was bumped up to 0.4% from 0.2%. Analysts saw robust new residential construction figures that sharply lifted prospects for Q1 residential construction, a weak nonresidential construction path that trimmed Q1 prospects, and particularly weak public construction data
Dallas Fed index plunged to an all-time low of -70.0 from 1.2 in February, as the index fell through the expansion-low of -34.8 in January of 2016, and the last recession-low of -59.9 in February of 2009. The ISM-adjusted Dallas Fed fell to an 11-year low of 39.1 from 52.3, versus a 6-year low of 44.4 in May of 2015, and a recession low of 34.0 in March of 2009.
Chicago PMI fell 1.2 points to 47.8 in March, after rebounding 6.1 points to 49.0 in February. This is not as weak as feared, especially considering the heavy concentration of auto manufacturing in this area, but the worst is yet to come. Nearly all of the components declined.
Consumer confidence dropped 12.6 points to 120 in March, not as weak as projected, after edging up 2.2 ticks to 132.6 in February. This ties the lowest since July 2017. Over the last four years, the index has ranged from a low of 92.4 in May 2016 to a high of 137.9 in October 2018 which was an 18-year peak.
A record number of Americans filed for unemployment as initial jobless claims surged to 3.283 million. That number was revised higher to 3.307 million this week setting an even higher bar for a new record. Despite that, this week’s print doubled last week’s record number as jobless claims came in at 6.648 million.
That is roughly 2% of the entire U.S. population filing for unemployment this week alone. Not only did this week’s release double last week’s record print, but it was also above the forecasts of 6.5 million. The size of the week over week changes have also been much larger than anything previously observed in the history of the data.
There have now been 9.96 million workers apply for unemployment insurance in the past two weeks. To put that into perspective, for the entirety of 2018 and 2019 there were only 11.5 and 11.3 million jobless claims. None of this is a surprise when we consider the economy is shut down, nonetheless, the magnitude of these numbers is staggering.
A very weak jobs number from the Labor Department for March just rolled in. Nonfarm payrolls fell 701K in March compared to 273K added jobs in February. That was also a much weaker number than the consensus forecast which was only predicting a drop of 100K. The last time that a larger decline was observed was in March of 2009 (-800K).
Since the reference week for the monthly report is in the first half of the month, the massive job losses recorded in the second half of March were not fully picked up in this report. In other words, next month’s report is going to be a LOT worse.
Pending home sales rose 2.4% to 111.5 in February, better than forecast and is the highest level since February 2017. This follows a 5.3% bounce in January to 108.9 (was 108.8) which was the largest percentage gain since April 2010. On a 12-month basis, pending sales accelerated to an 11.5% y/y pace versus 6.7% y/y previously and is the fastest since April 2015
Lawrence Yun, NAR’s chief economist:
“February’s pending sales figures show the housing market had been very healthy prior to the coronavirus-induced shutdown. The data does not capture the significant fallout from the pandemic or the measures taken to control the outbreak.”
“Numbers in the coming weeks will show just how hard the housing market was hit, but I am optimistic that the upcoming stimulus package will lessen the economic damage and we may get a V-shaped robust recovery later in the year.”
“Housing, just like most other industries, suffered from the coronavirus crisis, but once this predicament is behind us and the habit of social distancing is respected, I’m encouraged there will be continued home transactions though with more virtual tours, electronic signatures, and external home appraisals. Many of the home sales that are likely to be missed during the first part of 2020 may simply be pushed into late summer and autumn parts of the year.”
The J.P.Morgan Global Manufacturing PMI, a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM, rose slightly to 47.6 in March, up from 47.1 in February. This was almost entirely due to a stabilization of the China PMI which rose to 50.1, from 40.3 in February. The Global Excluding Mainland China PMI reading was 46.6 in March, its lowest level since May 2009.
The Eurozone Economic Sentiment Indicator fell from 103.4 to 94.5, the worst month ever as businesses brace for what’s to come.
The IHS Markit Eurozone Manufacturing PMI registered below the 50.0 no-change mark for a fourteenth successive month and fell considerably from February’s one year high of 49.2 to 44.5 in March. That was below the earlier flash reading and the lowest reading for 92 months. The latest data indicated that all market groups registered a deterioration in operating conditions compared to the previous month, led by the investment goods category.
Chris Williamson, Chief Business Economist at IHS Markit:
“Even the slide in the PMI to a seven-and-a-half year low masks the severity of the slump in manufacturing as it includes a measure of supply chain delays, which boosted the index. Supply delays are normally seen as a sign of rising demand, but at the moment near-record delays are an indication of global supply chains being decimated by factory closures around the world.”
“We need to look at the survey’s output and new orders gauges to get a better understanding of the scale of the likely hit to the economy that will come from the manufacturing sector’s collapse, and these indices hint at production falling at the sharpest rate since 2009, dropping an annualized rate approaching double digits.”
The IHS Markit Eurozone PMI Composite Output Index recorded its biggest ever single monthly fall in March to hit a survey record low of 29.7. Not only was the index down from February’s 51.6, but it was also notably weaker than the earlier flash estimate of 31.4 as the coronavirus disease 2019 (COVID-19) pandemic impacted heavily on the euro area’s private sector economy.
Chris Williamson, Chief Business Economist at IHS Markit:
“With various countries stepping up their measures to contain the spread of the coronavirus, it’s no surprise to see the final PMI for March indicated an even steeper deterioration of business activity than the prior record decline signalled by the provisional ‘flash’ estimate. The data indicate that the eurozone economy is already contracting at an annualised rate approaching 10%, with worse inevitably to come in the near future.”
“The service sector is currently seeing an especially severe impact from the COVID-19 outbreak, with travel, tourism, restaurants and other leisure activities all hit hard by virus containment measures. “No countries are escaping the severe downturn in business activity, but the especially steep decline in Italy’s service sector PMI to just 17.4 likely gives a taste of things to come for other countries as closures and lockdowns become more prevalent and more strictly enforced in coming months.”
The headline seasonally adjusted Caixin China Purchasing Managers’ Index, a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy, rose from a record low of 40.3 in February to 50.1 in March, to signal a broad stabilization of business conditions. This marked a strong improvement from the previous month when the nation imposed strict measures to stem the spread of COVID-19.
Commenting on the China General Manufacturing PMI data, Dr. Zhengsheng Zhong, Chairman and Chief Economist at CEBM Group:
“The Caixin China General Manufacturing PMI rebounded to 50.1 in March from a record low the previous month, indicating a limited improvement in manufacturing activity after widespread economic stagnation in February. The data in the survey, which was conducted from March 12 to March 23, reflected that manufacturers were still gradually getting back to work. The March expansion in the manufacturing sector returned to a level seen before the coronavirus epidemic.
1) Manufacturing output expanded, but orders declined. The worsening pandemic situation overseas is another blow to manufacturing demand. The subindex for total new orders stayed in contractionary territory for the second straight month in March, while the gauge for new export orders was still way below levels seen before the epidemic.
2) Stocks of purchased items shrank in March, inventories of finished goods expanded, and backlogs of work continued to grow, reflecting insufficient business resumption. Constrained by the downturn in new orders and restrictions on logistics and the movement of people, manufacturers did not increase raw material inventories. The subindex for stocks of purchased items rebounded slightly from the previous month’s record low, remaining in negative territory and at a relatively low level in recent years. The measure for stocks of finished goods returned to positive territory due chiefly to disrupted transportation. The gauge for backlogs of work was still at a relatively high level despite dropping slightly.
3) Prices of industrial products continued to fall. The gauge for input costs was still higher than that for output prices, although both were in contractionary territory. As consumption and other types of demand did not fully recover, downstream manufacturers were under greater pressure than their upstream counterparts to cut prices. Declines in raw material prices were largely transmitted to the prices of finished goods.
4) Manufacturers were still quite confident about the next 12 months, although the gauge for future output expectations fell slightly from the previous month. Employment was also relatively stable. The employment subindex returned to the normal level before the epidemic outbreak, despite staying in negative territory. The good news was that fundamental economic factors, such as business confidence and resident income, did not deteriorate substantially.
“To sum up, the manufacturing sector was under double pressure in March: business resumption was insufficient, and worsening external demand and soft domestic consumer demand restricted production from expanding further. Whereas, business confidence was still high and the job market basically returned to the pre-epidemic level, laying a positive foundation for the economy’s rapid recovery after the epidemic.”
Adjusted for seasonal factors, the headline Caixin Services Business Activity Index remained below the neutral 50.0 level at 43.0 to signal a marked drop for the service sector output. However, this was up from a record low of 26.5 in February, to indicate an easing in the downturn. The reduction was widely linked to the impact of restrictions related to COVID-19, which led to store closures and restrictions around travel in recent months.
Dr. Zhengsheng Zhong, Chairman and Chief Economist at CEBM Group:
“The recovery of economic activity remained limited in March, although the domestic epidemic was contained. In the first two months this year, China’s value-added industrial output and services output dropped 13.5% and 13% year-on-year, respectively. Estimates suggest their declines haven’t been as steep in March and the country’s first-quarter GDP is likely to have dropped significantly. Such a situation requires policymakers to cut this year’s GDP growth target and step up countercyclical efforts to support areas like consumption and infrastructure, particularly given the accelerated contraction in the service sector job market.”
The seasonally adjusted headline IHS Markit Hong Kong SAR Purchasing Managers’ Index rose slightly from 33.1 in February to 34.9 in March. Nonetheless, the latest reading signaled the second-sharpest deterioration of private sector conditions since the survey started in July 1998. The average PMI reading (38.3) for the first quarter indicates that Hong Kong’s private sector economy had fallen into a deeper downturn from the final quarter of 2019.
Bernard Aw, Principal Economist at IHS Markit:
“Hong Kong’s private sector economy suffered further damage as global measures to limit COVID-19 hit demand sharply. Latest PMI data showed the deterioration in business conditions in March was among the sharpest since the survey started in July 1998. “Key sectors of the economy such as retail, travel and tourism were decimated by the global coronavirus outbreak. Business activity across Hong Kong continued to contract at a severe pace in March, as new sales plummeted further.”
“With a rapid development of excess capacity amid worsening demand conditions, survey data showed a further fall in employment numbers, with affected firms either retrenching or putting workers on furlough. “The average PMI for the first quarter suggests that the Hong Kong SAR economy had fallen deeper into recession. There are also concerns that the downturn will worsen in the second quarter as more drastic antivirus measures may be taken worldwide.”
At 51.8 in March, the headline seasonally adjusted IHS Markit India Manufacturing PMI fell from 54.5 in February. The reading signaled the slowest improvement in business conditions since November 2019 and one that was modest overall.
Eliot Kerr, Economist at IHS Markit:
“The Indian manufacturing sector remained relatively sheltered from the negative impact of the global coronavirus outbreak in March, however, there were pockets of disruption and a clear onset of fear amongst firms. New orders and output both grew at softer rates, but those readings were relatively tame compared to those seen at goods producers in Europe and other parts of Asia. The most prominent signs of trouble came from the new export orders and future activity indices, which respectively indicated tumbling global demand and softening domestic confidence.”
“Should the trajectory of injections continue in the same vein, the Indian manufacturing sector can expect a much sharper negative impact in the coming months, similar to the scale seen in other countries.”
The headline Jibun Bank Japan Manufacturing Purchasing Managers’ Index, a composite single-figure indicator of manufacturing performance – fell to 44.8 in March, down from 47.8 in February, signaling a steep deterioration in manufacturing business conditions.
Joe Hayes, Economist at IHS Markit:
“Japan’s manufacturing downturn deepened in March as a result of the global COVID-19 pandemic which on top of the international supply chain paralysis caused by shutdowns in China, and now other parts of the world, has also dealt a severe blow to export demand.”
“The consequence was the steepest drop in goods production since the aftermath of the devastating tsunami in April 2011. Furthermore, firms reported an aggressive drop in new orders from the previous month, reflecting lower client demand in domestic and external markets.”
“The likelihood of the manufacturing recession deepening in the coming months is high. Latest data showed a sharp fall in inventories of inputs, which firms are going to find challenging to replenish in order to sustain factory production. There were reports among some panel members of production schedules being suspended, particularly those in the automotive sector. Overall, the cascading impact of COVID-19 on the global economy is diminishing the chances of a V-shaped recovery.”
The seasonally adjusted Japan Services Business Activity Index dropped by 13 points in March to 33.8, from 46.8, to signal a rapid acceleration in the decline in service sector output. The headline index during the latest survey period was close to the survey record seen in February 2009 (33.7) and consistent with a severe fall in business activity. According to panel members, the negative demand shock caused by the spread of COVID-19 had a detrimental effect on output.
Joe Hayes, Economist at IHS Markit:
“The global COVID-19 pandemic caused severe disruption to Japan’s services economy in March. There had already been some knockback in February from reduced tourism, particularly from China, but the latest data show that the economic impact has become widespread. “The headline index for the service sector sank by 13 points to reach a low not seen since the global financial crisis. This signals how aggressive and sudden the drop in activity has been as people stop partaking in non-essential activities.”
“During the March survey period (12-26 March), the outbreak in Japan was not even close to the scale seen in Europe and the latest combined manufacturing and services PMI data already point to GDP contracting at an annual rate of around 8%. If the outbreak were to escalate in Japan such that widespread lockdowns are imposed, GDP in the second quarter could be poised for an annual decline in excess of 10%.”
The headline PMI fell from 50.2 in February to 43.4 in March, to signal a renewed deterioration in the health of the ASEAN Manufacturing sector. Moreover, the figure was the lowest in the survey’s nearly eight-year history and indicative of a market downturn. All of the survey indicators hit a record low, with substantial rates of decline reported for output and total new orders.
Lewis Cooper, Economist at IHS Markit:
“ASEAN manufacturers felt the full force of the coronavirus pandemic in March. The headline PMI dropped to the lowest in the survey’s near eight-year history, amid record contractions of output, new orders, inventories and employment. Notably, March was the first time on record that all of the seven constituent countries posted a deterioration in the health of their respective manufacturing sectors simultaneously.”
“Restrictive measures stemming from efforts to contain the COVID-19 outbreak and substantial uncertainty surrounding the outlook also eroded firms output expectations during March. The sentiment was the lowest since the series began in mid-2012, although firms still remain, on average, the optimistic output will increase over the next 12 months. Overall, March highlighted the worst performance of the ASEAN manufacturing sector on record, as repercussions from the COVID-19 pandemic are realized, and indeed it is likely that they will be felt for several months to come, if not longer.”
The seasonally adjusted IHS Markit/CIPS UK Purchasing Managers’ Index fell to a three-month low of 47.8 in March, down from 51.7 in February and the flash estimate of 48.0.
Rob Dobson, Director at IHS Markit:
“The latest survey numbers underscore how the global outbreak of COVID-19 is causing huge disruptions to production, demand and supply chains at UK manufacturers. Output and new orders fell at the fastest rates since mid- 2012, while supplier delivery times lengthened to the greatest extent in the 28-year survey history as shortages grew more widespread. The resulting job losses took the rate of decline in employment to its highest since July 2009.”
“The effects were felt across most of manufacturing, with output falling sharply in all major sectors except food production and pharmaceuticals. The transport sector, which includes already-beleaguered car-makers, suffered the steepest downturn.”
“With restrictions aimed at slowing the spread of the virus expected to stay in place for some time, expectations of further economic disruption and uncertainty meant business optimism slumped to a series-record low. However, on a slightly more positive note, manufacturers still expect to see output higher in one year’s time.”
The IHS Markit Canada Manufacturing Purchasing Managers’ Index dropped from 51.8 in February to 46.1 in March, to register below the 50.0 no-change thresholds for the first time since August 2019. Moreover, the latest reading signaled the sharpest downturn in overall manufacturing conditions in nine-and-a-half years of data collection.
Commenting on the PMI data, Tim Moore, Economics Director at IHS Markit:
“Canadian manufacturers reported the steepest downturns in production, new orders and employment for at least nine-and-a-half years in March. Shrinking customer demand was almost exclusively attributed to production stoppages at home and abroad amid emergency public health measures to halt the COVID-19 pandemic. Some manufacturing companies cited an additional fall in new business related to a sharp drop in spending by clients in the energy sector.”
“The latest survey also highlighted by far the steepest lengthening of suppliers’ delivery times since the survey began in October 2010, with manufacturers most commonly citing shortages of materials and severe supply chain disruptions across Asia and Europe.
Falling from 50.3 in February to 46.9 in March, the seasonally adjusted IHS Markit Mexico Manufacturing Output Index pointed to a renewed contraction in production during the latest survey period. Moreover, the rate of decline was the sharpest for three months as the coronavirus pandemic hampered demand.
Eliot Kerr, Economist at IHS Markit:
“The Covid-19 pandemic has severely disrupted the global economy in March and the picture was no different in the Mexican manufacturing sector. Marked declines in both production and new orders were accompanied by a sharp deterioration in vendor performance, making business conditions extremely difficult. “The decline in new business was particularly prominent and gave evidence that the virus has driven a collapse in global demand.”
“The fall in Mexican factory production in March, though marked, was disproportionate to that seen in new orders and suggests we will see further output reduction as supply is pared back to match the dire demand environment.”
The 10-year Treasury bottomed at 0.40% over the worldwide fears that are present. The 10-year note yield rallied off those lows to 1.18% before falling back to close the week at 0.62%, down .10% from last week
The 3-month/10-year Treasury curve inverted on May 23rd, 2019, and remained inverted until mid-October. The renewed flight to safety inverted the 3-month/10-year yield curve once again on February 18th, and that inversion ended on March 3rd. The 2/10 Treasury curve is not inverted today.
The 2-10 spread was 30 basis points at the start of 2020; it stands at 39 basis points today.
Bullish sentiment rose from 32.9% to 34.2%. That is one of the smaller moves in recent weeks which leaves the indicator just about in line with the average for Bullish sentiment (34.4%) since the bear market began.
It may not have been by much, but bearish sentiment dropped below 49.7% for the first time since the first week of March. While lower, bearish sentiment remains very elevated compared to the past decade.
We are nowhere washout levels in sentiment that would indicate a bottom in stock prices is here.
As social distancing cuts out the daily commute, restaurant and store visits, and other ventures outside the home, EIA data is reflecting the lack of need for oil. This largely appears to be a result of the weak demand for gasoline. Demand for gasoline is down 31% or about 3 million barrels per day equivalent; this has been the worst period for gasoline demand since at least 1991.
The Weekly inventory report shows U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 13.8 million barrels from the previous week. At 469.2 million barrels, U.S. crude oil inventories are near the five year average for this time of year. Total motor gasoline inventories increased by 7.5 million barrels last week and are about 4% above the five year average for this time of year.
Following a 50+%drop in the price of WTI, prices finally rallied on the news of a potential cut in production by the Saudis and Russia. WTI settled at $28.33, up $6.80 or 30+% for the week.
The Technical Picture
Bear markets are characterized by huge whipsawing rallies that can last from a few days to several weeks. They are very hard to forecast and track. So when markets fail to follow up on Bullish rallies, then fail at key resistance levels and moving averages, we have to respect what the market is telling us.
In the last couple of trading days that is exactly what has occurred. A failure at resistance and a drop back to lower levels.
In a BEAR market, it’s very difficult to rely on support, instead, the emphasis has to shift to resistance. The descending green line (20-day moving average) will more than likely cap any rally now. Unless we do see a reversal of fortune and the index can overtake that trendline, we have to look to the downside as a path of least resistance.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.
U.S. Insurance companies Anthem, Cigna, Humana, and Aetna have announced they will be paying for all Coronavirus related treatment. Many other drug and healthcare companies and are also stepping up now donating supplies to battle the virus.
Yes, these are the same companies that some politicians want to handcuff, cripple and gut. Those ill-conceived notions surfaced during the Presidential campaigns were a ridiculous idea then and they are deemed even more absurd now. One can only hope these or other geniuses don’t come back to the table with more asinine ideas to cripple corporate America.
The corporations that provide the research drugs and vaccines along with employing many Americans in the process are hardly the enemy.
How ironic that they are now being asked to find a cure to help us all. The same can be said of the large tech companies like Facebook, Google, etc. and a company called Amazon. They are key players in providing the tools for the new “work at home” environment we now find ourselves in. They help in keeping families and friends stay in contact with each other. Deliveries of products go on at a time when many are sheltered in place.
Amazon, CVS, Dollar General, Lowes, Target, Wal-Mart, and others are hiring now, as the economy is shut down.
Individual Stocks and Sectors
These days my watchlist is dominated by Healthcare and Technology stocks, and that is where the focus should be now. Companies that may not be affected as much while the economy stays in this coma.
There are numerous ways to add value to a portfolio in any market backdrop. The recent extreme selloff in many areas of the market presented an opportunity. One such gem in the world of CEF’s was a Healthcare situation that was uncovered and shared with members of my service last week resulting in a 20+% gain in the process. Also, I rate this CEF as not only a survivor but one that will continue their generous dividend payout.
THE source for information that continues to point out more of these undervalued situations is The Stanford Chemist. The goal for investors these days is to identify who will survive, what CEF’s will continue to pay dividends, and over time will be great total return vehicles. Their latest missive is a must-read for anyone that wishes to look for the babies that have been tossed out with the bathwater.
The consensus view says what we just witnessed was “a bear market rally”. Most are looking for a test of the low after the rally was snuffed out. It matters little what we call it. All anyone wants to know is what happens next? On that score, there will always be plenty of answers. Coming up with the correct one is the key, and that isn’t going to be so easy this time.
So if someone wants to stretch themselves in one direction they might just want to rethink that move. The easiest conclusion and the one that will garner the most attention says the next move is a massive decline lies ahead. Others view a retest of the lows that will be successful, and yet some (the minority) indicate the low is in and price stabilization resulting in a trading range is next.
Since this has been an unprecedented decline in both time and magnitude, I would doubt the notion that this HAS to be a “textbook” recovery and market rebound. There may be plenty of twists and turns that are going to spin the average investor into the ground if they try to outwit the market.
Policymakers are struggling with walking a fine line. Preserving lives, preventing the economy from collapsing, and maintaining an overburdened health care system, all at the same time. With testing levels increasing daily and new faster, efficient processes being developed, the experts anticipate that the number of reported COVID19 cases will increase significantly in early April. They also tell us we will see a peak in the second week of April. While that is going on, unemployment will continue to increase as this shock forces many businesses to lay off their employees.
During the mini-rally, the stock market started to discount a lot of negative news. Watching terrible data points roll in should not be so unsettling nor surprising, they are expected. This week’s Dallas Fed Index fell to an all-time low, the market didn’t blink. Same with the 6 million unemployment claims filed this past week. In essence even before the data hits the newswire, it’s in the rearview mirror.
Then again there is expected news, and there is unsettling news. At the Coronavirus briefing on March 31st:
5:47 p.m.: Dr. Deborah Birx presents the new goalposts in a graph that shows a “no intervention” case (their original estimates of more than 1.5M American deaths) and a better-case “flattened” curve by following government guidelines, that accounts for 100,000-240,000 American deaths.
I continue to doubt the CDC will back off anytime soon. Dr. Fauci agrees with the 100,000 – 240,000 death scenario. The mid-point of that range would be 47 people per 100,000 residents. That isn’t much different from the number of people the U.S. lost to the flu in early 1953, late 1957, early 1960, the peak of the 1968-69 Hong Kong Flu, or early 1976. As of today, the U.S has suffered 7,000+ deaths (2 per 100,000) and the World’s total is 59,000 fatalities in a population of 8 billion (0.75 per 100,000).
Since the market is focused on the economy (as it should be), there is no separation between that focus and the virus dilemma. On that note, anyone waiting for any type of “all clear’ from the “experts” would appear to have a long wait ahead.
If I am correct, or there is a complete change of mindset on how to approach this issue, the probability is HIGH that this economy remains shut down for a longer period than anticipated by the market. All during the BULL market, the BEARs stumbled around looking for that one incident that they could latch on to. It never came along as they anticipated or predicted, but they did stumble into the Coronavirus pandemic. Now we find the BULLs scratching at the ground looking for that one positive on this situation that changes the narrative in one day. It may be just as elusive. How ironic.
The emergency measures already put in place will hopefully provide a bridge, but more may be needed to create as soft a landing as we can get. The jobless claims numbers from the last two weeks are unprecedented in history. Economically then, we seem to only be starting to see the effects of the coronavirus fallout, which means we can’t assume that this is just another normal speedbump that will quickly pass. It could easily morph into the deepest recession in history. How long it lasts is still up for debate.
In the meantime, Global central bankers have come together like an army that is firing missiles at this enemy. Antibody testing will start next week in the UK and Germany. Abbott Labs brought to market a point-of-contact test that gives results in minutes. Significant advances are being made in therapeutics and vaccines. Human behavior, market signals, and aggressive policy changes could start shifting the course of the virus. I’ll remind all that the black plague ended. Call this virus what you wish, seasonal flu-like, or the next big killer of our time. We can debate the number of deaths yet to come, that conversation is immaterial now. Rest assured there is NO debate as to the damage that has been done to the economies of the world.
The first skirmish has been a decisive BEAR victory. The Bulls have run back to push the skirmish to a more neutral setting. There will be plenty of battles in the coming weeks, despite this rebound rally nothing has been resolved.
Regardless of where stocks ultimately find a bottom, this current bear market is an opportunity for long-term investors. Especially those who can add money to their portfolios over time. Developing a strategy to play the inevitable recovery is a better choice than trying to pick a bottom. Let’s put the situation in perspective. As previous bull market recoveries reveal, buying at the absolute bottom is not necessary to generate sizable returns. Bear market declines are often rapid, whereas bull markets typically last for much more extended periods. The average bull market since 1958 advanced by 155% (price change only) over 41 months; whereas, the average bear market retreated 32% over a mere 10 months.
The average investor succumbs to fear and greed and spends a tremendous amount of unnecessary time searching for more data and opinions, watching the news, or questing for the non-existent “Holy Grail” answers. It should come as little surprise then that the average investor sees such poor performance results over time even as they gather more and more information. Instead, keep it simple.
Your situation should determine your strategy. My view: stay flexible and do not get stretched in any one direction in an attempt to “play” the volatility.
I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
Investors find themselves thrust into a BEAR market over a pandemic. The mini-rally looks to have ended, and there are ominous signals presented. How deep might the next leg down take stock prices?
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Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am Short the VIX via ETF’s. Various Option strategies are in use now to produce income in this bear market backdrop.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.
IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.
Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.
Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.