Exactly one year ago, the World Health Organization officially declared the Coronavirus outbreak a pandemic. This was an acknowledgment of what seemed clear to many already. Tom Hanks got the virus. Walt Disney closed its parks. The lights went out on Broadway. March Madness was canceled. The virus would spread to nearly every country on the globe. The Stock Market was in crash mode. Economies worldwide went into shock as nations locked down to contain the novel virus. Unemployment skyrocketed. The 11-Year Bull Market, the longest in history, ended. It was a scary time.
In an instant, a new Bull Market began. There was a crash down, followed by a crash up like never before seen. It was the fastest Bear to Bull Market recovery in history. The Fed went big. They went big, fast. Congress followed. Unprecedented amounts of monetary and fiscal stimulus also poured into the system. People got used to a stay-at-home environment and turned their attention to the Digital World. Online sales surged. Demand for deliveries grew far and wide. Home improvements took off. Day Traders dove into the Stock Market. Who would’ve thought the Stock Market would rally to all-time highs, with explosive price action, within a global pandemic. It sure happened.
Operation Warp Speed worked. The race to a vaccine came at speed and success previously unimaginable. In 12 months, there have been 118 Million Coronavirus cases globally and 2.6 Million deaths. Over 500K have been Americans. A year later, it’s still not over. But things have improved substantially. The rates of new infections and deaths have begun to fall nationwide. More than 62 Million Americans have already received at least one dose of a Coronavirus vaccine. 33 Million are now fully vaccinated. It increases by the day. So does the virus spread. The plan of vaccinating 100 Million Americans by the end of April appears on track. That was President Biden’s goal for his first 100 days. Johnson & Johnson and Merck are combining forces to expedite the process. This week the White House announced plans to buy another 100 Million doses of Johnson & Johnson’s single-shot vaccine. Added to the doses from Pfizer and Moderna, this new supply is more than enough to vaccinate every American. There now is expected to be supply for every American adult by May 1.
Washington got out its checkbook again. Congress formally approved one of the largest economic stimulus measures in American history. The President signed it last night. More money is expected to enter the system. More debt is being added to the mountain. The Market sees the recovery. It feels the recovery ahead. Some on the Street see 8% and even 10% growth this year as the reopening of America gains momentum. The Market is pricing in the explosive economic recovery. Stocks have been in rally mode, off some really oversold levels earlier in the week. Higher rates have been the cause of the turbulence. It’s really the speed that caused the instability. Rates are rising for the right reasons. The economic recovery seems to be accelerating and the cycle is transitioning from early to mid. The choppy price action can whipsaw investors, but volatility is something we’re accustomed to.
There’s been some serious movement below the surface of the Market. Leadership rotated big time, every day. Tech exploded higher on Tuesday, while Cyclicals lagged. It was most evident in the NAS vs the Dow. Wednesday was a complete reversal as Cyclicals led with the reopening trade while Growth and Momentum fell back. It switched again yesterday to Tech leadership. Friday was another reversal back to the Dow. The good thing is there is broad participation. Then there’s this: the Dow, S&P, and Russell 2000 all closed out the week at record highs. This might come as a surprise to some, since Tech has felt so much pain. It needed to correct. There was plenty of excess built up from the relentless rally in Tech stocks. They’ve gone a long way in the corrective phase. We’re buyers of the correction.
Thinking longer-term, a broad rally is a big positive. It’s just not clear if the selling is quite over. We think it’s close. You never know until you know. That’s the tough part of our job as Market professionals. We never know. That’s why it’s so important to study signals and maintain discipline. It also requires conviction and guts.
The Bond Market sold-off too. Rising rates mean lower prices. Interest rates are the price of money. Economic stimulus is inflationary. Rates are rising because the Economy is growing again. So is inflation. The cost to borrow gets more expensive. The increased debt load is playing a role too. US Debt to GDP is well north of 100%, despite the expected economic resurgence. How and when we pay for it is still an issue. Congress doesn’t seem to care. But the Bond Market does.
The Bond Market is the most powerful Market on the Planet. Political Strategist James Carville once said that he’d like to be reincarnated as the Bond Market, because it can intimidate anyone. When the Bond Market talks, we listen. The Bond Market is saying the economic recovery is happening. Things are indeed getting better. The Bond sell-off is a function of higher yields and a more normalized economic expansion. It doesn’t need zero rates. That’s what we hear the Bond Market say. But importantly, higher interest rates are not getting so strong as to act as a counter‐cyclical force. Rates are rising for the right reasons. The economic cycle is evolving and expanding. The country is moving back to normal. The World is moving back to normal. It’s just not clear what “normal” is.
It’s an era to remember. How could we ever forget. There’s plenty we’d like to forget. But life lessons are critical in pursuit of future positive outcomes. We humans learn through experience. I chronicled the events day-by-day in 2020. I went back and read what I wrote a year ago for perspective. It sure did bring back memories quickly. It’s just incredible to see what’s transpired on Planet Earth the last 12 months. I have included it below in case you were interested to read it again.
Have a nice weekend. We’ll be back, dark and early on Monday.
Limit Down, Limit Up
March 13, 2020
We are going to remember this week for a while. We’re going to remember it for a number of reasons. We are going to remember it for the Coronavirus. We’re going to remember it for declared states of emergency across the country. We are going to remember it for school closures. We are going to remember it for Spring Break adjustments. We’re going to remember it for Disney Theme Park closings. We’re going to remember it for the NBA season suspension, MLB season delay and March Madness cancelation. We’re going to remember it for Broadway shutting down. We’re going to remember that Tom Hanks and Rita Wilson tested positively for the virus. We will, without a doubt, remember this week for what is almost certain to be called the Corona Crash.
This was the worst week for stocks since 1987. For those that remember, the ’87 Crash was referred to as “Black Monday.” The Dow and S&P both fell over 20% that day. On Thursday of this week, the major indexes fell 10%. The Dow fell over 2,000 points. It gained almost 2,000 today, 24 hours later. This has been the fastest-moving, most volatile price action I’ve ever seen. It is faster and more volatile than the Financial Crisis was. There was panic like not seen since the Financial Crisis. This is the fastest a Bull Market has turned to Bear in history. It happened in just 19 days. Thursday’s sell-off was the 6th time in the last three weeks, where the down volume exceeded 90% of the total trading volume. That didn’t happen in 2008. It didn’t happen during the Crash of 1987. It never happened before. This has been historic. It has not been fun. But we keep navigating the choppiness, ready for whatever comes our way.
The week finished with some optimism, but it certainly didn’t start that way. Monday brought crash-like price action after the Futures Market closed limit-down. It did it again Thursday. Limit-down occurs when there’s a 5% decline in the Futures Market. It triggers a halt on trade until the regular session opens. That’s the first time it happened since the Financial Crisis. The circuit breakers were triggered within minutes of trading in the regular sessions, which resulted in a 15-minute halt. We had to brush up on our exchange logistical facts, as it’s been a while since they have come into play. Once the Market opens, NYSE circuit breakers work like this: trading halts for 15 minutes if the S&P 500 falls 7% at any time before 12:25 p.m. Another 15-minute pause is triggered if losses reaches 13%. If the decline hits 20%, the Stock Market will close for the day. These were created after the 1987 crash. It happened twice this week. In a bit of irony, it took place on the 11-year anniversary of the Bull Market beginning. It officially came to an end. How did the Market respond the day after the biggest daily decline since the ’87 Crash? How about limit-up? It happened. The Futures Market was halted after a 5% gain, which set-up Friday’s explosive rally, which went a long way to erase Thursday’s decline. This was a week we will remember for the rest of our lives.
The Fed sent record liquidity to the Market Thursday, with intent to cool the crisis. It didn’t work. The sharp decline highlighted the diminishing ability of stimulus to cure the crisis. Fiscal policy is what’s required for recovery. Washington has been so divided, which has exacerbated the issue and caused so much confusion and fear. It is finally looking like Congress is working in a coordinated fashion with the White House, putting aside partisan issues, to get things done. The Market responded favorably to that. A recession is pretty much guaranteed. But the coordinated response will go a long way to determine how deep and how long the US Economy contracts.
Volatility has been at historic proportions around the globe. The Volatility Index (VIX) hit a high of 77 this week. That is by far the highest it’s been since the Financial Crisis. It closed the week at a still hyper-elevated 57. For reference, the VIX spent the better part of the last 2 years between 10 and 20. The news is almost certainly going to get worse. But the Market already knows that. A lot of negativity has been priced in. For example, the day to sell Disney is not the day they announced the park closures. That’s historically the time to buy. It was already anticipated if not expected and priced in. The question is how long and how bad. That remains to be seen. Disney’s stock has been hammered this year, but had a really good day today. There are so many stocks like that. That’s what bottom formation is like. Bad news becomes good news. Stocks start moving higher in anticipation of recovery. In some better news, all of Apple’s 42 stores in China have reopened. That is significant. You can start seeing how things could be better 2-3 months from now. The Market looks past the now.
We are in deep detection mode to study signs of bottoming. We think it’s close. It is a process. Price discovery always is. There were definite signs of capitulation Thursday. Friday’s rally looked and felt good. It’s refreshing to see green on the screen heading into the weekend. Make no mistake, there are still so many issues and unknowns that need resolution. Even though we think a low is near, there’s likely to be a lot of backing and filling to form a strong base and prove a bottom is in. That generally brings a series of rallies and failures. How that transpires will go a long way to determine when a sustainable recovery begins. Our sense is this volatile price action continues throughout the Spring. We’ve been active. We’ll continue to be active. We’re all over it.
Have a nice weekend. We’ll be back, dark and early on Monday.