April 12th, 2020 –
It was a strong bounce week on Wall Street with the S&P gaining over 12%. From its low of 18,213 on March 23, the Dow closed Thursday at 23,719.37, up more than 5,500 points, a 30% gain in just 3 weeks. The rise can be credited to both much better than anticipated virus numbers as well as the unprecedented stimulus response from our government. I strongly urge you to re-read previous posts prompting you to remain open-minded in the face of this crisis, as it now seems that the circulated report from Imperial College grossly overstated the death counts, hospital projections and other horrific outcomes. At the same time, our government has now unleashed amounts of stimulus funds, the likes of which we’ve never seen in the history of our country. While it began with individual stimulus checks, it quickly evolved to: ever-increasing unemployment benefits, now, in many areas, more than a median income and lasting 10 months, forgivable small business loans, grants and, on Thursday, a new program by which the Federal Reserve will actually backstop corporate debt, hence giving the banks another safety net and for leveraged businesses a ‘get out of jail free card.’
Many are surprised by the market’s response; however, I am not. If 2009 taught me anything it was to never underestimate the lengths that our administration will go to fuel a market rebound. In addition, we all must be extremely careful with the news we ingest. Fear sells, and if you’re still clicking on the most dramatic headlines, reading the most scary reports and falling victim to countless hours of scrolling through Internet drivel, I strongly urge you to take a big step back, understand that the truth lies somewhere in the middle and not one single person, I repeat, SINGLE PERSON, knows precisely what will happen from here.
While the bounce was welcome, I view this as a gift and a fantastic opportunity to raise further cash and take an even bigger step, OUT of the market. So, on Thursday, as the market reacted excitedly over the Federal Reserve’s most recent bailout actions, we were busy queuing up sell orders and raising more cash. In the coming weeks, we will continue to review all client portfolios and make adjustments where needed to reduce risk.
Despite the plethora of headlines, I work extremely hard to focus on the data and data alone. While there is now a light at the end of the tunnel regarding the virus in addition to the unprecedented monetary response by our government, there are some very disturbing economic facts emerging.
At present, there are over 15 Million people out of work. In the coming weeks, this number will grow and, while many of these people will return to employment once we begin to reopen the economy, the reality is that many jobs will be lost forever. One in three renters have not paid rent in April, and in New York City alone this number is upwards of 40%. While in many cities evictions have been frozen for the next 90 days, thus providing little incentive to pay rent, these unpaid rents will not be forgiven and will still be due in the future.
The ripple effects from massive unemployment are unclear. One can surmise that we are on a long road to recovery, regardless of how quickly we reopen the economy.
While the government is currently providing backstops against the financial difficulties, the negative ramifications are concerning. While businesses are shut down, sales tax and payroll tax are not being collected thus state and municipal governments are seeing a significant decline in revenue. At the same time, state unemployment coffers, in many areas, are underfunded with a shockingly short amount of time before depletion.
Yes, while it is true we will return to work and resume our daily lives in the near future, it is unclear just how significant the economic damage will be, as the result of our global effort to slow the spread.
Once again, I am forced to consider all of this information through the lens of the capital markets. From my vantage point, the most important thing we must embrace at this juncture is extreme patience and flexibility. We have now taken what we consider to be dramatic steps towards caution in managed accounts by reducing our equity exposure and building what will eventually become our opportunistic buying power. While many are becoming more optimistic, through the recent market bounce, we’re taking a more conservative approach, thus becoming more cautious.
Bear markets take time and often provide significant bounces along the way. It is my view that we have, most definitely, entered a bear market and the recent bounce we’re seeing is an opportunity to further reduce risk. We will continue to monitor the situation on a daily basis and, as always, update accordingly.
I have fond Easter memories. As a child, we would attend a church service which always concluded with a massive egg hunt. We would gather with family, and my mother always made ham with scalloped potatoes and cheese, that I can still taste if I close my eyes. While this Easter is much different, as we watched church from a laptop and gathered family via Zoom, I am thankful that the message of hope remains the same. I am certain there are better days ahead.
Until next time