Macro Musings March 2020
An Unfathomable Decline
The stock market saw its fastest decline from an all-time high to a 20% decline
The impact on the economy has been immediate, with a collapse in travel and leisure related activity, and a spike in initial claims for unemployment that is only expected to get worse.
Data and information are changing by the minute, but we expect the market to remain volatile for the foreseeable future and will look to MACROCAST™ to give us the signal that the worst might be behind us.
A complete change in the outlook in less than a month
The world has not seen a pandemic of this magnitude in over 100 years. The outbreak of COVID-19 went from a relatively contained regional epidemic to a global crisis in a matter of weeks.
It is difficult to use economic data to tell us exactly where we are headed, as many important economic indicators like GDP are published with a lag.
Initial Claims for Unemployment are one of our most reliable leading indicators because they provide up-to-date information about the state of the economy on a weekly basis. Even though this week’s report reflects claims for the previous week, they still spiked from 211,000 to 281,000, a big jump. Next week’s report is projected to be massive, with potentially 750,000-2,000,000 claims nationwide. To give you some context, they’ve never been higher than 700,000 in any single week in history.
While some parts of the economy will hold up better than others, several industries are projected to see devasting declines in revenue (from Goldman Sachs):
Companies are now suspending earnings guidance because they have no clue how to assess future sales. For example, Apple still thinks that its latest iPhone will be released on time in September, but how sure can they be? It is challenging to project phone sales with any level of confidence when unemployment is expected to rise, putting pressure on consumer demand. Everything depends on how adeptly the pandemic is handled, how quickly the spread of the virus is contained, and how people will behave in the months ahead. Each of which is an unknown.
Everything is being impacted, not just stocks
While equity markets around the world have suffered, this chart from Sentiment Trader shows other asset classes have also undergone big declines.
This type of mass selling has not occurred since the global financial crisis of 2008. We think part of what might be happening is outright selling by funds that are overleveraged and being forced to liquidate to meet margin calls and client redemptions.
When The Bear Market Finally Ends, Expect A Strong Rebound
This table from Ben Carlson shows the worst drawdowns in US history. Regardless of the depth of the market’s drawdown this time around, there is a good chance the market will be higher 1, 3, and 5 years later.
Some of these numbers are staggering, and the table obviously doesn’t tell us when the bear market will stop or how deep the final drawdown will be. It simply shows that when a bear market is truly over, the market historically hasn’t looked back.
So What Happens Next?
We believe it will take the market time to hit bottom, and we are not expecting a “V” shaped recovery like we saw at the end of 2018. That said, we must be at least open to the possibility of a sharp, strong rally in the event of any good news. What do we consider “good” news? An effective treatment of the disease that would minimize the need for hospitalization might be all the market needs to recover. A vaccine would be ideal, but reports indicate that the earliest a vaccine could be mass produced would be 12-18 months from now.
While stimulus from the Federal Government is expected and would undoubtedly help suffering industries and workers, we don’t think it will be enough to signal a bottom. The economic impact beyond the first several weeks and months is unclear, and it could be months or years before some industries return to pre-pandemic levels.
However, the market could bottom while the news gets worse. The market is a discounting mechanism that looks ahead of the data by roughly 6-9 months. By the time terrible employment and GDP numbers are released, the market will likely be looking ahead to the potential rebound.
Corbett road is grateful for your trust during this difficult period
We, at Corbett Road, want to assure you that we are doing all that we can to serve you during this challenging time. We will continue to monitor the situation as it evolves, analyze the data and its economic implications, and offer guidance and advice in our clients’ best interest.
We thank you for your enduring trust in us.
The chart(s)/graph(s) shown is(are) for informational purposes only and should not be considered as a suggestion of any investment recommendation, investment strategy, or as an offer of advice to buy, sell, or exchange any investment product or investment vehicle. Past performance may not be indicative of future results. While the sources of information, including any forward-looking statements and estimates, included in this (these) chart(s)/graph(s) was deemed reliable, Corbett Road Wealth Management, Spire Wealth Management LLC, Spire Securities LLC and its affiliates do not guarantee its accuracy.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.
All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. MACROCASTTM is a proprietary index used by Corbett Road Wealth Management to help assist in the investment decision-making process. Neither the information provided by MACROCASTTM nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The phrase “the market” refers to the S&P 500 Total Return Index unless otherwise stated. The phrase “risk assets” refers to equities, REITs, high yield bonds, and other high volatility securities. Past performance is no guarantee of future results.
A drawdown is the peak-to-trough decline during a specific period and is usually quoted as a percentage. A V-shaped recovery is characterized by a sharp economic decline followed by a quick and sustained recovery.
Index information is provided for illustrative purposes only and is not meant to represent the performance of a fund. The index returns do not reflect any management fees, transaction costs or expenses. Performance displayed represents past performance, which is no guarantee of future results.
Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC, a Registered Broker/Dealer and member FINRA/SIPC