Historic Intraweek Volatility

Market Update, 2020-03-16: Historic intraweek volatility hit US equity markets again last week. Volatility in the S&P 500 has not been this high since the U.S. credit rating downgrade in 2011, which was a market low.

Last week, domestic news surrounding the COVID-19 virus overshadowed better news in China and Korea on that front.  It was the factor behind everything we’ve saw in financial markets last week, including the large rally in Treasury bond yields.

Details

Even with Fridays almost 10% intraday rally, the S&P 500 ended the week down about 9% on the week.  Germany was down -20% as Europe has become the new virus epicenter.  There was nowhere to hide in stocks and most bonds as the least bad groups were consumer staples (-8.1%) and telecommunications (-9.6%). “Boring and stable” utilities were down close to -20%.   The selling was indiscriminate which usually happens closer to the end of selloffs than the beginning.

Friday’s almost 10% bounce in the S&P 500 (largest percentage gain since 2008 and biggest point gain ever) lowered the weekly loss to “just” 8.8% after the technical “bull market” (as we’ve discussed: arbitrarily set at -20%) came to a halt mid-week. The S&P 500 ended Friday down 16.1% for the year and 19.9% below the February 19 peak. We did begin seeing a possible peak in “collateral” volatility last Friday which led to Friday’s late day rally.

U.S. equity futures are back down to Friday’s lows this morning. The 10-year Treasury yield is down 19 bps to 0.78%. It hit a historic intraday low of around 0.31% early last week, before retracing higher. WTI oil is down 5% to $30 a barrel.

Federal actions

Not waiting until Wednesday of this week, the Fed unleashed its crisis playbook late Sunday afternoon to try to support the economy, financial system and credit markets. To recap their historic moves:

• They cut short term rates 100 bps to 0%-0.25%.
• They restarted QE with $500 billion of Treasury and $200 billion of mortgages.
• Activated lines with other major central banks to support US$ lending.
• Cut bank reserve requirements that should encourage banks to lend.

Additionally, the House passed a historic virus aid bill on the weekend and it should clear the Senate this week. The bill includes measures to support workers with enhanced unemployment insurance, two-weeks of paid sick leave, and three months of paid family and medical leave, and measures to support businesses via tax relief. An even larger rescue package is now being discussed to shield workers, businesses and consumers from the disruptions and to provide overall economic support to cushion the downturn. On the table are proposals to: reduce payroll and other taxes, target assistance to the most affected businesses (such as airlines, hotels and restaurants), send cash payments to households, suspend student loan payments, and broadly increase federal spending.

Investors should expect more of these policy announcements and new programs in the days ahead. While not immediate in their economic help, these should prove to help stabilize and grow the economy up in the second half of 2020 and 2021.  Congress is working on a broader economic response to coronavirus pandemic that would go beyond package currently being negotiated.” Read more in this Wall Street Journal article.

Historic Economic and Investment Shock

The economic and investment shock we are experiencing in H1 2020 is sudden and unexpected to even the biggest and most experienced investors, as noted here. As recently as early February, the US economy was on pace to grow about 3% in 2q2020 and with the sudden and needed shut down in services to slow the virus growth, it looks like economic growth will come in at a -5% or lower in Q2.  Investors should remember that stocks tend to trough and peak in front of economic momentum, both positive and negative momentum.  Event driven “bear markets” such as this have lasted on average 7–8 months.  We believe the closest analogies are 1987, 1980, 1990 (short, sharp shocks, 2 out of 3 were “recessions”) with an average real S&P 500 drop of -25-26% or 2500-2,550 (we are there now).

At the end of this note, we have attached a recently released article penned by Goldman Saks and their experts that we found educational and in-line with our forward thoughts.

Partners in Historic Times

We want to reemphasize the importance of remembering your particular financial plan and investment allocation. Your plan is based on your goals, risk tolerance and time horizon, and is constructed with the knowledge that there are going to be periods of extended market decline. It is a part of being a long-term investor. Everyone is going to feel fear when the stock market dips into bear market territory as it currently is. That’s completely normal, and it’s why your advisor and the investment team at Oak Harvest are here. We are here to help you deal with that emotional roller coaster, and to prevent long-term investment decision making based on short-term events, fear or panic. We remain committed to making the best investment decisions for our clients on a daily basis.

Economic insights

Goldman Sachs had an investee call where 1,500 companies dialed in. The key economic takeaways were:

• 50% of Americans (150 million people) will contract the virus as it’s very communicable. This is on a par with the common cold (rhinovirus) of which there are about 200 strains and which the majority of Americans will get 2–4 per year.
• 70% of Germany (58 million people) will contract it. This is the next most relevant industrial economy to be affected.
• Peak-virus is expected over the next eight weeks, declining thereafter.
• The virus appears to be concentrated in a band between 30–50 degrees north latitude — meaning that like the common cold and flu, it prefers cold weather. The coming summer in the northern hemisphere should help. This is to say, that the virus is likely seasonal.

Impact on individuals:

• Of those impacted 80% will be early-stage, 15% mid-stage and 5% critical-stage. Early-stage symptoms are like the common cold and mid-stage symptoms are like the flu; these are stay at home for two weeks and rest. 5% will be critical and highly weighted towards the elderly.
• Mortality rate on average of up to 2%, heavily weight towards the elderly and immunocompromised. This means up to 3 million people (150 million times 0.02). In the US about 3 million people per year die, mostly due to old age and disease — those two being highly correlated (as a percent very few from accidents). There will be significant overlap, so this does not mean 3 million new deaths from the virus. It means elderly people dying sooner due to respiratory issues. This is not a historic event, but it may stress the healthcare system.
• There is a debate as to how to address the virus pre-vaccine. The US is tending towards quarantine. The UK is tending towards allowing it to spread so that the population can develop a natural immunity. Quarantine is likely to be ineffective and result in significant economic damage. However, it will slow the rate of transmission giving the healthcare system more time to deal with the case load.
• China’s economy has been largely impacted which has affected raw materials and the global supply chain. It may take up to six months for it to recover.

Historic global impact:

• Global GDP growth rate will be the lowest in 30 years at around 2%.
• There will be economic damage from the virus itself, but the real damage is driven mostly by market psychology. Viruses have been with us forever. Stock markets should fully recover in the second half of the year.
• In the past week there has been a conflating of the impact of the virus with the developing historic oil price war between KSA and Russia. While reduced energy prices are generally good for industrial economies, the US is now a large energy exporter, so there has been a negative impact on the valuation of the domestic energy sector. This will continue for some time as the Russians are attempting to economically squeeze the American shale producers and the Saudi’s are caught in the middle and do not want to further cede market share to Russia or the US.
• Technically, the market generally has been looking for a reason to reset after the longest bull market in history.
• There is no systemic risk. No one is even talking about that. Governments are intervening in the markets to stabilize them, and the private banking sector is very well capitalized. It feels more like ‪9/11 than it does like 2008.

Resources

• Check out these helpful podcasts by Chris Perras, CFA®, here.

Weekly market updates contain general information and expresses views of Oak Harvest Investment Services. Data, articles, and information cited are believed to be reliable at the time of creation, but is not guaranteed. Content should not be regarded as personalized investment advice. Views and opinions expressed may change without notice and do not constitute a recommendation, or an offer or solicitation to buy or sell securities. In addition, Oak Harvest makes no assurance as to the accuracy of any forecast made. Past performance is not indicative of future results. Investing involves the risk of loss.