Market Outlook

March 31, 2020

Into The Great Unknown


John Boyd

Normally, as I prepare to write this column each month, I review a wide variety of economic and market data that I track on an ongoing basis to inform my view of what lies ahead. For the most part, I don’t need to do that today. And that speaks volumes about the situation we are now facing. Either the data are from before the market plunge and the shutdown of huge swaths of our economy, so they bear no resemblance to today’s situation. Or they do reflect the current environment, but then bear no resemblance to any of the historical data! To take one example, new claims for unemployment had been averaging about 200,000-250,000 per week on a seasonally adjusted basis, for the past several years. This past week they hit 3.3 million — more than 10 times the average! The next highest number recorded since the series began in 1967 was 695,000 in 1982. We are clearly in uncharted territory.

Even comparing Covid-19 to SARS or other pandemics of the past in terms of how quickly the stock market recovered (as I did in the February issue) may not be that useful as none of the others sparked a global shutdown of economic activity.

Comparing the length and depth of previous bear markets isn’t a perfect fit either, but it does provide some parameters to consider. Of the 14 bear markets in the S&P 500 since 1929, half experienced peak losses of 30% or less, versus a peak loss (so far) in this new bear of 34%. Thus in terms of downside, we may be fairly well advanced already. However, I must note that during the last two bears — the Financial Crisis of 2007-09 and the Tech Bubble of 2000-02 — the S&P 500 fell 59% and 49%, respectively.

Finding A Bottom

As noted above, given the magnitude of the maximum decline so far, it’s possible that we have put in a bottom already, though bear markets often re-test and fall below the initial lows before finally bottoming. To reach a solid bottom, obviously, we have to see new cases of Covid-19 in the U.S. peak and start to decline. It appears that new cases peaked in Italy (which was even slower to respond than we were) on March 21. Each of the 10 days since has seen fewer new cases than that. In terms of the progression of the disease, we appear to be about two weeks behind Italy. If we then peak around the second week in April, the new directive from President Trump to extend social distancing through that month may prove sufficient.

Once people start to return to work, I would look for improvement in market internals such as breadth moving higher (advancers outpacing decliners), new 52-week lows falling below 40, and credit spreads coming down (the spread between high-yield bonds and Treasurys is now so high it has prompted us to make a trade.

We Will Get Through This

I don’t know when, but I do know that this crisis will end and the markets will recover. Between now and then a lot of economic data will be mind-numbingly bad and volatility will likely remain elevated in response. But that data won’t remotely reflect the long-term earning power of firms. So don’t let your emotions swing up and down with the market. The market may drop further before reaching a final bottom, but bottom it will, and some of the best days in the market come right after that bottom is reached. Significantly, the ratio of insiders buying versus selling their company’s stock has surged to a two-decade high, even higher than at the lows of the 2008-09 financial crisis.

 — John M. Boyd