30 seconds or Less ….

How will we know when we’ve hit bottom?

1. Defining the Duration – Getting closer with expectations of 12 weeks. Validation of timing should happen with a mid-April peak. (Pretty please with sugar on top!)
2. Not reacting to the Horrible News  –  Continued numbing of the markets and the public to the horrible news that will come out over the next few weeks. The market should not swing wildly but trade within a reasonable range despite poor earnings, awful jobless claims, some bankruptcies, and very poor health news. Time is needed to validate.
3. Bridging the Economy – The CAREs act will start to work its way into the hands of businesses and consumers replacing the spending from the shutdown of the U.S. economy. Time is needed to see it work.
4. Continued Stabilization of Credit Markets and Leveling of the US Dollar – The Credit (or bond) Markets continue to stabilize with the ongoing support of the Federal Reserve and perform within a new normal range. This doesn’t mean credit costs will return back to pre-virus levels, it means that companies and governments can continue to access much needed funds through the markets.  More importantly, bond prices will continue to move opposite stock prices which is a normal market function and not seize up as they had in March. Further, the U.S. dollar will float back down with continued Fed support.
5. A New Frontier in Valuations – Whether companies choose to report earnings next week or leverage the 45 day Securities & Exchange Commissions (SEC) extension, analysts and traders will retool their analysis and look to how well positioned companies are in the post-virus economy (i.e.: strong management teams, solid supply chains, debt loads, innovations & expectations of demand will be post-virus) and not to this quarter’s poor earnings reports.  

IN THE WEEDS –

Tell me again, how will we know if we’ve hit the bottom?

1. Duration of this Event Defined?  The U.S. Government has taken the unprecedented steps to shut down the U.S. economy.  The big question is for how long?  A number of studies look at China, South Korea and Italy who each had very different government responses but all show similar timelines with the virus, 6 weeks in and 6 weeks out. That would suggest that our peak for new cases should be mid-April which is what the administration has said. If that holds, there is reasonable grounding for the event time horizon to be about 12 weeks.  We will have found our duration!  Also, drug programs like the anti-malaria tests and new vaccine trials will be critical to keeping the duration short and not having to deal with a secondary wave!

2. Not reacting to the horrible news!  This week has seen continued volatility but in a more narrow range. The markets are off the bottom of the 18,591 when the Dow was in free fall but we didn’t entirely hold the positive bounce from the passing of the CAREs act, either. However, the unprecedented response in both speed and size of support by lawmakers and the Federal Reserve has buoyed the markets. We are not seeing the irrational “sell-at-all-cost” behavior which gripped the market the 3^rd week of March. This is good news!  Now, we need to watch and see that as the nightly news health, jobless claims, and poor earnings reports continue to be grim over the next couple weeks that the market holds similar trading levels or (similar up days as down days).  This is also known as Selling Fatigue which we talked about earlier in the week.

3. Bridging the Economy! – Yesterday, I had the pleasure of the listening to the Chief Investment Officer at BofA share his perspective on the market. He said we should think about the CAREs act, not as traditional federal stimulus which has a multiplying impact (for example for every $1 given out, $1.25 or $1.5 ripples through the economy) as it has in past downturns, but rather as a bridge from the pre-virus economy to the post-virus economy because the Government has taken the unprecedented action of shutting down large parts of the economy. Consequently, the Federal Government is providing bridges for businesses and consumers until the economy can re-open. Now, that makes sense! The CAREs Act was the 3^rd bill with the first two being narrow and specific in scope. Congress is prepared to enact a 4^th bill if necessary but needs to allow time for CAREs to actually get into the economy. States have not received all the operating instructions to distribute the extra unemployment payments and banks haven’t received the parameter for some of the Small Business programs like the Payment Protection Plans yet. It takes time to get such massive programs through the system and into the hands of those in need!

4. Stabilizing Credit Markets – The Fed’s broad based and deep activities over the past few weeks have been largely successful. The primary goal of the fed was to get the credit markets (or the markets where companies and governments issue debt through bond sales) working again. The irrational “sell-at-all cost” behavior hit both equities and bonds as investors and companies sought to hoard cash. In most down turns, bonds go up in price when stock prices go down. The Fed’s support of the bond markets has returned the market to its normal inverse relationship with stocks. That’s not to say everything is perfect yet. We talked earlier in the week about the unintended consequences of the Fed’s intervention on the Mortgage market. Tuesday, the Financial Times described the Commercial Paper Market (where strong companies get short term financing up to one year) as “creaking” but functioning. And as the Fed has moved rapidly to provide new ways to access the US dollars oversees with the primary focus to reduce the price of the US dollar for developing countries and emerging market debt which is written in US dollars. These effort have helped drop the cost of the dollar off its peak but it’s still high for many analysts.

5. A New Frontier – Earning season is upon us. Publicly trades companies normally report the prior quarters earnings a couple weeks after the close of the quarter.  The Securities & Exchange Commission (SEC) which governs the trading markets extended the deadline for companies to provide their earnings reports 45 days after quarter-end (or next month.)  Some companies have already said they will take the SEC up on the extra time.  Some companies had said they’d make normal reporting schedules but can still change their mind.  And many companies have said they won’t provide the typical full year forecasting because they can’t until they know the time horizon on the pandemic. Regardless of when or if the reporting comes out, analysts and traders shouldn’t be looking at the typical quality of earnings or any of that the normal components they call the fundamentals of price valuations. Those are irrelevant in a market where supply chains are disrupted and demand simply does not exist. They should be “looking through” this current crisis and into the recovery.  (Again, not responding to immediate bad news.) Which companies will be best positioned with strong management teams and cash to bounce back quickly as the U.S. economy restarts? That is the multi-million dollar question you should be asking!

What can I do?

It’s time to start talking to your financial advisor about your own financial goals if you haven’t already. Are you positioned to make the most of the recovery when the market turns?  Should you be considering selling some laggards on one of these up days so you have the cash to buy a high quality stock that’s set to out perform in a recovery? Are you in the right investment vehicle for your financial concerns or should you re-visit traditional IRAs versus Roth IRAs?  Now’s the time to do the house cleaning on your financial portfolio just as you have been doing in your house!

Again, focus on staying healthy, helping those in need in your community, getting outside in this beautiful weather, and being your amazing self!  We will lead our families and our teams through this crisis! 

#BeTheCalm!!! #Leadership!!!

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Stay Healthy! Susie