We don’t have to re-hash the story that is this virus and what it’s done to the markets. We know we had one of the fastest market drops in history. We also know last week was the largest one-week rally since 1974. And the bounce back from ‘the bottom’ has been remarkable.
The challenge now is figuring out how to make sense of everything. Are we in a V-shaped recovery? Or is this a bull-run in a bear market?
The truth is, we don’t know yet. But here is some editorial opinion on what seems to be taking place.
First, this thing is moving faster than anything I’ve ever seen in the markets. It took 23 trading days for the S&P 500 to fall almost 34%. In the past 13 trading days it’s rallied up nearly 25%. That’s some pretty huge moves over the past six weeks.
Why such massive moves? In a word: guessing.
The major narrative has been one of fear and speculation about the spread of Covid-19. In particular, markets appear have latched onto the news out of New York as the primary indicator for success or failure over this virus.
As both headline fatigue and political manipulation (yeah, I said it) become more significant in the New York story, the markets are starting to shift to the next important thing: earnings. And earnings season is right around the corner now.
Here’s where the rubber will start to meet the road. The market is not as sensitive and caring as you might hope. No, it’s a mercenary predator seeking ways to discern price and locate opportunities. And if the news out of New York isn’t going to drive the heards one direction or another, the economic realities that start to show up in earnings will come into play.
There are estimates economic activity could decline by as much as 30%. That kind of number is not something most are ready to actually tackle. Consider this simple math: if S&P 500 earnings were to fall 30%, they would go from estimates of about 180 to 126. If we apply a 15x multiple to that figure, the S&P 500 would fall to 1890. That’s a decline from here of another 32%.
I could make the case things could get even worse than this. But then where would we be? Oh yeah… guessing.
We have massive government stimulus on its way. MASSIVE. TRILLIONS!!! And we have massive Central Bank intervention. Again, TRILLIONS!!! This most assuredly will have an impact on things. But it is yet unknown as to how much this will help actual corporate earnings. And ultimately, this is the story… stimulus, medical case tracking, shut-downs and target re-opens… all of it is just the market trying to get a sense of how earnings will be impacted.
When we break down the technicals, even they are struggling for clarity. The BigFoot Market Macro and Credit Macro are both in the Red. The algo database is at 19.54% long, with 49% of those positions listed as waits. All three major indexes have algo-sells. Only the Economic Macro has not gone negative so far, but it is on the decline.
So all the artificial intelligence shows signs of problems. Yet the market rallies. What going on?
Well, for one thing, pricing got really extreme on the downside. Then, when we weren’t looking at economic data and just hoping the economy would re-open, markets got real optimistic this thing would be over as fast as it started.
Now reality is starting to set in. While we will most certainly survive this event, there is no certainty as to how long it will last. Schools are closed and going to remote-learning models for the remainder of the year. Governments are already committing to ‘stay home, stay safe’ orders extending through May. Unemployment is skyrocketing. And consumer behaviors are shifting as the necessity of capital preservation becomes reality.
We’re starting to hear comparisons to the Great Depression…
This week we’ll also watch the fixed income markets closely. The government has played a dangerous game by all but encouraging people to skip rent, mortgage, and utility payments. For those individuals, it may help with cash flow, but the repercussions to the banking system may be significant.
And what does all of this mean? Pricing insecurity. How do we know how much a bank stock is worth if we don’t know whether or not its loan portfolio is stable? And even if the Fed backstops all the banks (which I suspect they will), how does the market price interest rates when payment on loans is inconsistent? If the loan hasn’t defaulted, but it’s not getting paid, how does one value the assets?
This is the world we live in right now. A world where economic rules are being tested, broken, or re-written on a near-daily basis. So sure, we can be optimistic that we’ll beat this virus… and we will… but between now and then, how does the market figure this out?
It’s hard to understand this rally as more than a technical bounce because of over-sold market conditions. When looking at the bigger picture of earnings and price stability, this market seems to be out over its skis and looking for a possible tumble.
If we’re to continue climbing from here, it would be towards the 50-day moving average. It’s hovering around SPX: 2900 value. That’s another 4-ish percentage points higher for the SPX. If the index were to fall from here, the likely targets are 2660/2575, or about 4.6-to-7.6% downside.
If futures are any indication, the market are likely to open down.
One thing to watch this week will be volatility. If the VIX continues to decline and the day-to-day price swings narrow, that’s an indication this market is searching for its footing. But again, there is still a ton that is unknown at this point.
Last week was a big week. We’re at the start of a new quarter. Rent payment for most tenants were due. So we should start to get a sense of how the consumer is fairing very soon. The rest of the month we should start to see the market discussion shift from infections and death rates to more economic data. My concern is that the medical data may be improving, but the economic data is failing. If so, the best-case scenario V-shaped recovery may be in danger.
(It should be noted, I mentioned the Great Depression language sneaking into the media narrative. This, in my opinion, is part of the politics of the day, and is part of how media keeps us glued to our screens. This is not likley to be a ‘Grapes of Wrath’ kind of depression. This is more of a ‘government nanny state with decent infrastructure and creature comfort, but very little opportunity and limited personal liberty’ kind of depression.)
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.