Many Americans have been conditioned to believe that virus outbreaks can be contained "over there." Geographic separation was supposed to happen this time as well. For many Americans that logic lasted until February 29 when we learned of the first COVID-19 death in the U.S. For others this lasted until March 11 when the WHO declared COVID-19 a pandemic. Maybe the "over there" thinking ended later on the eleventh when the NBA suspended their season and folks heard Tom Hanks and Rita Wilson had COVID-19. This will be a longer post than normal, so let's jump right into price, sentiment and valuation for April 2020.
Price
Source: dshort blog, March Month End Update
Jill Mislinski writes the following at the DSHORT blog at Advisor Perspectives:
All three S&P 500 MAs are signaling "cash" and four of five Ivy Portfolio ETFs — Vanguard Total Stock Market ETF (VTI), Vanguard REIT Index ETF (VNQ), Vanguard FTSE All-World ETF (VEU), and PowerShares DB Commodity Index (DBC) — are signaling "cash".Moving averages match what we observed at the end of February in the March Market Update. To put the 10-month simple moving average in perspective, the Leuthold Group sent the following graph on twitter (please click on image to enlarge):
As I wrote in the December 2018 update (describing the November move in the chart above), "the U.S. economy is decelerating in Q4 and VTI month-end price barely rose above the monthly moving average indicator, therefore I remain skeptical of this price action and currently do not want to enter this possible investor trap..."
If you use the 10-month simple moving average as a tool, and not your only point of analysis, then you can put these changes in context. The cause for the end of May sell signal quickly reversed itself. This signal triggered after President Trump hinted at placing tariffs on Mexico, which lowered stocks during the last week of May. After Mexico offered assistance with immigration issues and the business communities of both countries protested, President Trump quickly reversed his rhetoric and the stock market continued higher. The February 2020 sell signal happened after 85 countries had at least one confirmed case of COVID-19. To confirm the negative news from the pandemic, U.S. officials announced the first death from COVID-19 related to community spread of the virus on February 29. The end of February "cash" signal captured a material change in the investment landscape which remains with us today.
Sentiment
Source: CNN Business Fear & Greed Index
The CNN Business Fear & Greed Index starts the month at 25 up from 10 we recorded at the end of last month. This is quite a change from the January 2020 Monthly Update when the sentiment measured on the last day of December registered 93. The current reading is straddling the line between "Extreme Fear" and "Fear." More on this in our summary section.
Moving on to examining volatility, the CBOE Volatility Index (VIX) ended March at 53.54. As Keith McCullough, CEO of Hedgeye, recently explained to investors: if the VIX is equal to or above 31 and the economy is in QUAD 4 (growth & inflation slowing) and the High-Yield spread is wider than 500 basis points then investors need to avoid adding capital to the stock market. This current market is for traders not investors.
Valuation
This month is a perfect example of why so many traders ignore valuation. The price is known but until more time passes we can only speculate about earnings and revenues. That said, let's not forget that at the February 19 peak one could argue U.S. stocks were at their most extreme valuations in U.S. history. As the stock market was peaking, investors like Erik Townsend, MacroVoices host, had already alerted us to the coming pandemic. To sum up our current situation: most extreme valuations in U.S. history and highest global debt levels ever recorded meets a global pandemic.
Summary
According to the Ivy Portfolio, price signals indicate investors should remain in "cash" rather than "invested" for four of the five asset classes with only IEF signaling "invested." Sentiment levels remain "extremely fearful", however they have risen off their low levels from last month. This makes sense as we've seen over 42 Central Banks cut interest rates during March and multiple countries enacted policies to support their citizens during this pandemic. This support attempts to soften the economic blow that is ahead of us; it cannot prevent it. We cannot have a healthy economy without public health. Living in a post COVID-world, I look forward to the dialogue around some form of universal healthcare in the United States.
One element of this cycle stands out as being different than cycles of recent memory. Monetary and fiscal policy were able to provide support before any major credit events. This may prolong the journey to the bottom of this cycle, while also raising the level of the eventual bottom. A quick V-shaped recovery back to all time highs within 6 months seems like a low probability outcome. @Sam_a_bell recently described the recovery as: \_____~~~~~. That picture summarizes my current expectations as well.
In December 2019 I wrote cycles still matter. A few weeks later, a famous hedge fund manager publicly stated the boom-bust cycle was over. We are now experiencing a full credit and employment cycle. For the U.S., the unemployment rate will change from 3.5% (lowest rate since 1969) and the credit cycle is starting from a point where global debt has reached over $253 trillion according to the Institute of International Finance (IIF).
As David Rosenberg, Chief Economist & Strategist of Rosenberg Research & Associates Inc., pointed out last month, we face five shocks to the global economy all at once:
- A global demand shock
- A global supply shock
- A negative wealth shock
- An oil shock
- A credit shock
We also need to remember pre-pandemic economic predictions for 2020. In 2018 many students of the economy were expecting a challenging period for the U.S. economy in early 2020. Please read:
- Bernanke Says U.S. Economy Faces a ‘Wile E. Coyote’ Moment in 2020 (Bloomberg June 2018)
- Forecasting the Next Recession: The Yield Curve Doesn’t Lie (Guggenheim Investments October 2018, view their Recession Probability towards the end)
"The S&P 500 closed today at a "generational buying opportunity" not seen since, um … mid-January 2019."As always, wise investing my friends. Please stay healthy, humble and kind.
Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.--------------------------------------------------------
Here's what I've been reading, listening to and watching recently:
- Putting the Fastest Correction in History into Context (Felder Report)
- Who Fueled The Fastest Bear Market Ever? (Schwab)
- David Rosenberg: Stop looking to 2008, this crisis is more like 9/11 (Financial Post)
- Down Best Six Months Not Encouraging (Almanac Trader)
- The missing six weeks: how Trump failed the biggest test of his life (The Guardian)
- This Is How the Coronavirus Will Destroy the Economy (NYT Opinion)
- Covid-19 has exposed our financial fragility (Unheard.com)
- Why ‘Price-Insensitive Buying’ Is To Blame For Many Of The Major Economic Problems We Now Face (The Felder Report)
- Dutch Scientists Find a Novel Coronavirus Early-Warning Signal (Bloomberg)
- The Faustian Bargain (Guggenheim)
- Episode 985: Where Do We Get $2,000,000,000,000? (Planet Money)
- Billion-Dollar Blows to U.S. States Crater Spending Plans (Bloomberg)
- Three Ideas To Fight The Recession (Planet Money)
- How the Pandemic Will End (The Atlantic)
- COVID-19 Projections (IHME)
- Understanding unemployment benefits and how they've changed (The Ladder)
- Germany will issue coronavirus antibody certificates to allow quarantined to re-enter society (The Telegraph)
