Snapshot March 30, 2020
Market Review: Week Ending 3/20/2020
Despite falling 3.4% on Friday, the S&P 500 Index gained 10.3% last week to close at 2541, registering the largest weekly gain since March 2009.1 At its trough on Monday, the S&P 500 had dropped 36% from its intra-day peak2 as the world remains mired in a health care and economic crisis. On Friday, the US reported its 100k infected person which now exceeds China in infections, doubling the level reported only 3 days before, and up from ~100 cases on March 12. With 1 of 2 Americans now in lockdown mode in “stay at home” states, the economic damage is becoming apparent. Weekly jobless claims this week were the highest ever recorded at 3.28m, compared to the peak of 680k claims in the Great Financial Crisis (GFC) of 2008/9.2 With 15m employed in the “Leisure and Hospitality” sector alone, as many as 10m will soon be receiving unemployment benefits as many economists think the unemployment rate will be in the 8-10% range in Q2.2 March ends the longest streak of monthly job gains in history, as the US produced 113 straight months of gains that totaled 22m jobs, a streak that saw the unemployment rate drop from 10.1% at the height of the GFC to a 50-year low of 3.5% in 2020.2 Consumer confidence began to reflect the collapse, as University of Michigan’s Consumer Sentiment Index registered the 4th steepest decline in history, falling nearly 12pts to 89.1.2 Government officials have acted swiftly this crisis with significant monetary stimulus plans (Fed’s balance sheet is now over $5T2) along with the passing of the 3rd fiscal stimulus plan, which is a massive $2T bailout plan (the largest in history)2 that is designed to be a bridge to the other side of the healthcare crisis. The plan includes direct payments to individuals, enhanced unemployment benefits, and numerous loan/grant proposals for small businesses, as well as significant amounts dedicated to hard-hit industries.2 Unlike two weeks ago when investors sold off the blue-chips that had declined the least in a desperate attempt to get cash, this week saw the opposite, with companies hit hardest this bear market snapping back the most including Boeing (+70%), Royal Caribbean (+45%) and Sysco (+43%). Fundamentum portfolios have higher allocations to cash than the neutral benchmarks. We have tax-loss harvested and raised the quality of portfolio holdings where appropriate. While we believe there is long-term value in equities at current levels, we emphasize the long-term, as equities could fall further as the news is very likely to get worse before it gets better. The best-case outcome, a V-shape bottom for the economy, could set the stage for a significant market rally in 2021 or perhaps earlier. Even if that were to occur, downside risks are still large enough that we continue to remain patient before adding to risk assets. Bear market rallies of the likes witnessed last week are normal and are typically followed by a series of retests, often to new lows.2. As the data and news continues to worsen, this would not surprise us. Through the close Friday, year to date results for the major indices are as follows: S&P 500 -20.96%, Russell 2000 -31.92%, MSCI EAFE –23.55% and Bloomberg Barclays Aggregate Bond 2.67%.1
What We’re Watching in the Week Ahead
- COVID-19 – With the stimulus bridges in place, investors will scour the daily reports of new cases for signs of a peaking in the spread of the virus. It is presumed that the economy can’t be restarted until there are clear signs of a flattening of the curve. We can’t assess the magnitude of the recession and its impact on corporate earnings until there is some sense for the duration of the shutdown. In our view, a durable stock market bottom cannot occur until the market discounts that likelihood.
- TED Spread – The TED spread is technically the difference between the three-month Treasury bill and the three-month LIBOR based in US dollars.2 Said differently, it is the difference between the interest rate on short-term US government debt and the interest rate on interbank loans and is seen as a bank’s willingness to lend to other banks and the presumed risk of those loans. Normally in the 20-50bps range,2 the TED spread spiked to 450bps in the GFC and has recently spiked to 143bps during this crisis.2 Liquidity provided by the Federal Reserve isn’t being funneled into the real economy if banks are unwilling to lend to other banks and the TED spread is a measure of the price of that willingness to lend. We will be watching to see if this spread decreases as an indication that money is flowing into the real economy.
- Economic Reports – Weekly Jobless claims has become an immediate look into the magnitude of the demand destruction, so this Thursday’s report will be closely watched after last week’s staggering rise to an all-time high of 3.28m. Reports on the ISM Manufacturing and Non-Manufacturing Indexes for March will also be released this week and are expected to collapse given the nature of the lockdown in March.
As always, we appreciate your confidence in our team.
Fundamentum Investment Committee
Chad Roope, CFA® Portfolio Manager
Paul Danes, CFA® – Investment Committee
Trevor Forbes – Investment Committee
Matt Dunn, CFA® – Chief Compliance Officer
1-Morningstar Direct 3/29/20
Investment advice offered through Fundamentum LLC a registered investment advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the investment objective of any investment strategy will be attained. Investing involves risk including loss of principal. Past performance is no guarantee of future performance. All indices are unmanaged and may not be invested into directly.