It has become widely known by now that the current status of the equity bear market was achieved at the fastest pace in U.S. history. After all, if you simply recall the media headlines of early March you will find a drastic contrast to what we’re currently experiencing, both in the economy and across global capital markets. We’re learning [the hard way] the effects of manually applying the emergency brake on economic activity through the eyes of a global pandemic, one that is only fully understood by experienced epidemiologists. What’s even more interesting in this entire scenario, is that the 400 PhD economists at the Federal Reserve have no experience, and clearly no working economic models, to gauge the best course of action in handling this issue. If you add to that the fact that no elected leader in the world has any experience in a scenario where they must shut down economic activity in an effort to preserve human life, then the perspective of what’s happening around the world should take on a different meaning. In our view, such perspective provides more clarity as to why there appears to have been a mass panic reaction within global equity markets and especially within fixed income markets. Global market participants were truly dealt an unforeseen and highly uncertain blow the likes of which has not been remotely evident since at least the Spanish Flu of 1918. The appropriateness factor of such a reaction starts to become clearer, if not at least more justified in the short-term. Our on-going assessment of the situation, as has been expressed through numerous video and written commentaries, continues to favor objectivity amidst the chaos. There’s no hiding from the fact that the volatility we have experience in just 2-3 weeks has been significant, but we must attempt to pinpoint its true fundamental weakness as we focus on the long-term. Such an approach provides for a potentially less gruesome outcome than what may be currently amplified across media headlines.
The Standard & Poor’s (S&P) 500 provided some clues last week as to the potential sentiment of the current bear market and how it may play out over the long-term. It’s very difficult to gauge whether a bottom has occurred in the market but what we believe is that the eventual upside may be one that signifies tremendous pace, like the downside. The S&P 500 gained over 17.50% in just three days last week before the closing the week with a total return of over 10%. Again, it’s important to note that the significance of such quick upside provides little guidance on whether or not a new secular growth cycle has already emerged, but it does provide a glimpse on the important nature of maintaining equity market participation amidst the volatility. For those investors with a least a 3-year investment horizon, or longer, the current state of the equity market provides little basis for exiting. Strong consideration should be given to readjusting the risk profile of your existing equity market exposure and even potentially selling bonds to buy stocks. These are all steps we have proactively taken across our multi-strategy platform, being constrained only by client directed investment objectives that dictate the upper threshold of desired equity market participation. It is often very difficult for retail investors to adamantly want to acquire equity market exposure at such levels because it may feel like you’re catching a falling knife. Our gut, our heart, and our brain are often battling each other with different emotions that are very normal for such an environment. The answer is never clear and there will never be a clear road map in effectively pinpointing the bottom of the equity market. When such unforeseen events occur, our goal is to take advantage of it by acquiring equity market participation that is now on sale. Our goal is not to time the market. For further clarity on this topic, and to better understand our internal assessment of the potential for a quick snapback in economic and market activity, please reference the multiple information videos that we have sent out, along with our written commentaries. If you have not received such information, please call your financial advisor.
In sticking with the ‘Making History” theme of today’s commentary, I want to touch on the weekly jobless claims data of last week where we learned that nearly 3.3 million people filed for unemployment. I believe such a figure will become a true statistical outlier for those studying this time period in the future but, for now, we must consider its severity. The S&P 500’s intraday activity during the announcement appeared to shrug it off as the index gained over 6% and overall sentiment was indicating an expected outcome in jobless claims. It’s highly possible that we may see additional claims over the coming weeks as restaurants are closed, and overall leisurely activities have halted. The passage of the new stimulus bill last week may provide much needed assistance to those in need as fiscal and monetary policy have stepped in to help the American people. It remains highly uncertain as to what the immediate effect this stimulus bill will have when we’re unaware of the extent of all closures, but any stimulus is better than no stimulus. President Trump has indicated a desire to open the economy by Easter (April 12th), but it appears that no one around him has echoed such a stance, which further adds to the angst and uncertainty.
As it relates specifically to unemployment in the U.S., we must take into consideration that most Americans are still receiving a paycheck during this tumultuous period. Such a fact carries a tremendous positive catalyst for the eventual recovery once things open back-up. Such a fact also indicates that the systemic failures that we saw in the credit crisis of 2008 may not be embedded in the current environment. We have discussed this fact extensively in our videos over the past few weeks. At the end of the day, the equity market and the economy are two different animals that react differently to the same set of news. We recognize that and we remain proactively engaged in the objective nature of our multi-strategy platform.
Edison Byzyka, CFA – Chief Investment Officer
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All return data sourced from Bloomberg. All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.
Small Business Optimism sourced through NFIB. Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan.
Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites.
Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changed in the aggregate market value of 500 stocks representing all major industries.