Attempt to State the State of the States

Opening America back up is on everyone’s mind. Doing it the right way is essential. Not everyone agrees on what it might look like. It is clear now that each state is responsible for itself. The White House provided Federal guidelines for reopening to the Governors yesterday. Signs of a path towards opening the world’s largest economy and the possibility of an effective treatment for the coronavirus sent stocks higher into the weekend.

There was some positive, yet anecdotal, data on Gilead’s Remdesevir in the treatment of coronavirus. It’s a small trial in Chicago that is providing the reported benefits and creating optimism. Gilead itself made a statement of caution with the data, but the Bulls are running with it anyway.

The White House outlined a guideline for the multi-stage reopening of America for Governors to use. The President said as many as 29 states could open up relatively quickly. Governors of both parties made it clear they will move at their own pace. Texas is looking at early May. Florida is already moving on it. The Mayor of Jacksonville announced the partial reopening of its beaches this weekend. This comes just days after professional wrestling was deemed an essential business in the sunshine state. So there’s that.

The Bulls are in full force right now, with a V-shaped recovery scenario being priced in. We just don’t see it and believe the oversold rally is losing steam. What’s important, the Bond Market is telling a different story. You take a step back and wonder how the Stock Market can rally so much while 22 Million Americans just lost their jobs.

The Bond Market just doesn’t seem to be buying this Stock Market rally. Yields keep falling. The 30-yr Treasury yield fell from 1.42% down to 1.19% this week. The 10-Yr fell from 0.77% to 0.58%. It might not seem like a lot, but these are really big moves in a short period of time. And they’re going lower. Rates should be going higher if the worst is over and a return to growth is back on the horizon.

The Fed has gone to great lengths to provide stability and liquidity into the financial system. They literally put “whatever it takes” into action. The Fed has been buying up assets to provide massive support. It’s been working. But there’s only so much they can do. But they’ll keep trying. I saw an interesting interview with a former Fed official this week who is concerned the Fed is causing irreparable harm to free markets because it’s created a dependence and has enabled and rewarded bad behavior. She said, “the Fed does not know exit.”

Money keeps pouring back into Treasuries. It can’t just be the Fed buying. Also, Gold hit multi-year highs. These are both proven safe havens for money during Market turbulence. It’s sending a different message than the Stock Market.

The Bond Market matters more. Stress exists in the Junk Bond Market. Hertz is reportedly seeking assistance to stay solvent. There is speculation the rental car company is in discussions with government and Asset Backed Security lenders for relief as it faces a $1 Billion budget shortfall and potential Summer bankruptcy. Brick and Mortar Retailers continue to face crises too. JC Penny and Neiman Marcus skipped an interest payment this week. They now need to work with lenders to restructure debt or file chapter 11. We are hearing that a Neiman bankruptcy filing is almost certain within the next few weeks. This activity is not bullish and definitely has our attention.

More reason for near term concern: Reality is setting back in. Congress is fighting over the next round of financial aid, having kicked a decision out to next week. The Banks are halting home equity lines of credit. China’s economy contracted for the first time in decades. European car sales were cut in half. None of this comes as a surprise, but the level of economic damage is just staggering.

It was interesting that the Dow led Friday while the Tech-heavy NASDAQ lagged. It’s the opposite from earlier in the week when the Tech Titans carried the overall Market higher. Large Cap Tech has been bid up big and has gotten quite crowded. They seem ripe for a sell-off. Short-covering sent many of the beaten-down areas like the Airlines, Hotels, Energy and the Banks skyward. It doesn’t look sustainable. Volume has been really low of late. The Stock Market feels tired.

The Market (meaning stocks, bonds, commodities, etc.) overall was drastically and universally oversold at the lows. We found a lot of value and were aggressive buyers in March. In just three weeks’ time, the Market has become way overbought. It was a crash down, followed by a crash up. Overbought always lasts longer than oversold. There seems to be a great deal of investor complacency right now. Many on the Street are chasing this rally, which is not uncommon. Investor sentiment increasingly believes the worst is over and the bad has already been priced in. Economic results have started to come in for March. They are bad. They’re going to get worse.

Make no mistake, we believe tremendous progress has been made and the 3-week rally has provided comfort, stability and some breathing room from the panic. But the process of recovery is expected to be long and will require patience. It’s not going to be quick. We have been increasing our hedges to provide more downside protection. We will be buyers again at lower levels. We expect the volatile price action to continue. Hang in there. Hang on tight.

Have a nice weekend. We’ll be back, dark and early on Monday.


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