Madness, Continued

Madness, continued.  Stocks fell yesterday on upset hopes of stimulus and the WHO labeling the Coronavirus a pandemic. The eleven year old bull market ended for the Dow Jones Industrial Average, which entered bear territory yesterday.

N O T E W O R T H Y

Sitting bull.  Bull markets don’t last forever… though it sure felt like they did just a month ago as stocks were at all-time highs. Since the financial crisis, the bull market survived many challenges. Namely BREXIT, the Taper Tantrum, a trade war with China, H1N1 pandemic, Ebola, Mideast tension, the Greek Debt Crisis, and many more.  It took the spread of the COVID-19 Coronavirus and a Saudi Oil dump to bring out the bear yesterday.  It is important to note here, as I have so many times before: bulls don’t die, they just rest.  If you look back in history at the S&P500 (which still closed above bear territory last night), there have been 11 bear markets since the 1950’s. They have ranged in length from 2 months to 1.7 years.  The Bull markets on the other hand, ranged in length from 2 months to 12.3 years (not including this past one). The average gain in the bull markets has been around +153% while the average loss in bear markets has been around -34%. The average length of bull markets has been 55 months and the average length of bear markets has been 11 months.

This past bull market for the Dow Jones Industrials started in March 2009 and lasted 132 months. The takeaway here is that bear markets don’t last forever and are, on average far shorter than bull markets.

What is your rationality?  It is no easy task to watch the markets spike up one day just to give up all the gains on the following day. Last year’s strong performance for both stocks and bonds makes the task acutely difficult.  Markets are in a state of irrational, and emotional reaction brought on by the onset of the Coronavirus Pandemic.  First, let’s acknowledge that the virus is a serious health threat and that it will certainly cause some financial pain to companies as they struggle to deal with cancellations and diminished sales.  The markets should, in theory, reflect the temporary financial impacts on the companies income statements.  I say “in theory” because it is clear that markets have recently been very volatile with what appears to be indiscriminate selling and buying in reaction to global events and not necessarily to corporate guidance.  Right now there is a lack of clarity on the real effects of the virus going forward as global central banks and governments clamor to shore up their economies.  Here in the US we have had decisive moves from the Fed with more expected.  The Trump Administration announced, WHILE YOU SLEPT, that it has authorized the Small Business Administration to issue $50 billion in loans to small businesses which are impacted by the virus. Additionally, though not completely clear yet, the Administration has instructed the Treasury to defer taxes for certain individuals or businesses.  The Wall Street Journal reports that the Treasury is considering deferring income tax filing, though that has not yet been confirmed. Finally Trump has asked congress to eliminate payroll taxes in order to soften any financial difficulties caused by the virus.  Both Democrats and Republicans seem reluctant to offer an across-the-board payroll tax cut but both parties are working on their own versions of stimulus plans, expected soon.  Trump’s Oval Office speech last night was, unfortunately, less than what markets were looking for.  His announcement that he will suspend most incoming traffic from Europe was also disappointing to markets for two reasons: 1) The President’s tone was far less positive than prior, and 2) the already struggling airlines are about to struggle even more.  Equity futures sold off overnight hitting limit bottoms in response to the address.  The market is likely to open far lower than yesterday’s close as traders work their opening positions.  It will be another challenging session, but these won’t last forever.  As more information is released in the coming days and weeks, there will be less uncertainty and stock prices will rationally adjust to reflect the temporary effects of the virus’ impact on earnings.  Be rational, focus on the long game, gain comfort from the statistics as they are on your side… and so are we, so please call us if you have questions.

THE MARKETS

Stocks sold off yesterday as the W.H.O. labeled the Coronavirus a Pandemic causing the Dow Jones to close in bear territory for the first time in eleven years.  The S&P500 dropped by -4.89%, the Dow Jones Industrial Average fell by -5.86%, the Russell 2000 slipped by -6.41%, and the NASDAQ Composite Index sold off by -4.7%.  Bonds also fell yesterday, weighted down by widening spreads to reflect risk (see bond spreads in the bottom panel of Chart 17 in my attached daily chartbook).  Ten-year treasury yields climbed by +6 basis points to 0.85%.

NXT UP

- Year over year, the Producer Price Index is expected to have slowed from 2.1% to 1.7%, while the PPX Excluding Food and Energy is expected to have remained constant at 1.7%.

- Initial Jobless Claims may come in with +220k new claims versus last week’s +172k claims.

- The Treasury will sell $16 billion 30-year treasury bonds.

- This morning Dollar General beat estimates and we will hear from The Gap prior to the opening bell.  After the close we will get numbers from Broadcom, Slack, Oracle, DocuSign, and Ulta Beauty.

daily chartbook 2020-03-12