As we write, you are surely hoping as are we, that the worst of the crush is behind us. The S&P 500 index recently bottomed at 2186 and has traded its way back to a rebound. And though thankful for the brighter tape, stocks are still down significantly from the 3383 historical high recorded on 2/20/20.
For the market to resurrect the February high we need a 30%+ gain from here. Given enough time, markets will set new records. The answer to “how much time will it take?” is the same answer for “have we seen the lows?”. We will proffer a guess – “we don’t know” and “maybe.” Bottoming normally takes time, and it occurs without notification. And though theoretically we should be buyers at the bottom, only the lucky will have done so. We have nibbled at a few stocks, and we have jettisoned a few who might lag the market as it recovers.
As we surmised several weeks back, Fed accommodation and fiscal promises are now realities. The markets are momentarily applauding! However, our economy is now clearly headed for a least a short and nasty retraction. Prior to the pandemic weeks, initial claims for unemployment hovered in the low 200,000’s. This week claims have topped 6 million. For comparison, the previous high in weekly claims was 695,000 in Oct. 2, 1982. We have seen estimates from economists that as many as 14 million will lose their jobs by the summer. As a caveat, economic forecasters assume everything except accountability.
We wonder just how long we will we need to remain bunkered? Certainly you must be wondering the same. We don’t do well with uncertainty. We quite obviously would welcome an expected date for when we might return to some semblance of normality. We get vague indications of perhaps a few weeks to a much longer time frames. As much as we don’t like not knowing, the market dislikes it even more. This is the fear which has led to panic in the markets. As suggested a few weeks ago, markets are remarkably adept at discounting the future. They do so much quicker than we humans do.
The Fed is buying bonds in the open market. They are purchasing treasury bonds, municipal bonds and mortgage backed bonds. Purchases are listed on the Fed balance sheet as assets. The Fed recently purchased $586 billion, rocketing assets held to $5 trillion. Interest rates on treasury bonds, bills, and notes earlier this week were amazingly stingy:
3 month treasury -.003%
1 year treasury .127 %
5 year treasury .43%
10 year treasury .735%
30 year treasury 1.318%
Negative interest rates are no longer just a Japanese or European issue. Who would invest in a security which is guaranteed to lose money? The answer is either someone who is paralyzed by fear or someone who believes rates will trend more negative (and money could be earned by selling the bond at a higher price- perhaps to the Fed). As we have discussed, the decline in treasury yields contrasts with higher yields for most other debt instruments including corporate, mortgage backed and preferred securities. Prices for debt have experienced both panicked and forced liquidation. As we review debt holdings in our portfolio it’s important that we eliminate bankruptcy risk, not market risk. Federal Reserve and Congressional promises will mitigate many bankruptcies but not all. We’re not interested in holding energy debt from companies that can’t stay solvent if oil trades for less than $30 for an extended period.
There has been discussion and argument over whether our self-imposed economic shutdown will lead to health outcomes more malignant than the virus running its natural course. We’re not willing to engage in the argument. We did read a research report that looked at life expectancy changes during the Great Depression. During the early years of the great depression (1930-1933) life expectancy actually improved significantly. However as the depression lagged and entered a second stage, unemployment rose again, and life expectancy dropped dramatically. Our wish is that we all were compliant with the suggestions and orders to slow the spread, ease the stress on healthcare and liberate us from sequester. If we were to reignite the economic engine in a month or two, we would be quite ebullient about markets recovering.
In the meantime, try not to focus on gyrations in stock prices. Look forward to recovery with patience and don’t worry about trying to time it perfectly. If you nibble on investments, worry not where they are priced but where they could be priced two years hence. Take a break from watching the virus related media. Don’t listen to doomsday dogma. It will be proven inaccurate!
And remember there are no dumb questions. We are all locked down, focused and looking for opportunity.