We believe we are in a wait and see mode and very data dependent as we move into April, but the market didn’t take that stance on Monday with the S&P 500 rallying 7% to start the trading week. The market took a more positive tone regarding data out of New York and globally regarding the virus. The market was also buoyed by the reports that an agreement could be on the horizon for oil production. And we have seen companies access the debt markets which is a positive sign that liquidity is improving.
It is not uncommon to see relief rallies in the middle of a crisis, and we are approaching bull market territory from the March 23rd lows. Despite the markets positive action, we believe risks remain elevated as there are many unanswered questions. It is true that the market will typically lead the positive news by discounting the “green shoots” or positive tidbits. It will also typically have false starts throughout the crisis before eventually bottoming and moving forward. The trajectory of the Covid-19 outbreak and the impact on the economy is still developing and uncertain.
Earnings matter for valuing companies and that outlook is murky at best. The first quarter earnings reporting season kicks off in earnest next week. The market can be temperamental during earnings season in the best of times. The first quarter results will not be meaningful as it is mostly old news, but the comments by management teams will be closely followed looking for guidance on the outlook and the financial health of the company. Making forecasts in this environment will lack precision and rely more on probability forecasting which will add to the uncertainty.
As we have discussed in prior notes, global central bankers and governments have moved rapidly to provide support to the markets and the economies. The support coming in two steps, the first step is monetary stimulus by central bankers. Step one appears to be opening the credit markets and providing the necessary liquidity. Borrowing rates remain elevated for corporations, but we have seen several companies accessing the debt market which is a positive. This improved credit markets are a necessary positive to move towards recovery.
The second step is fiscal stimulus which will come in more disjointed waves as legislators respond to problems. The government kicked off their first major stimulus program on Friday, the SBA Paycheck Protection Program (PPP). The PPP is a $350 Billion loan program funded in the Cares Act passed by Congress on March 27th. This program is providing loans to small businesses to assist them in paying wages and overhead for the next eight weeks. There were plenty of headlines over the weekend regarding the rough start to the program, but that should not be unexpected. To have a program of this size up and running in this amount of time is remarkable. The Treasury department has opted for speed over precision which seems to be a worthy trade off in this scenario. The second cash infusion to front line employees will be coming in a few weeks with $1,200 per employee and $500 per child distributed below certain income hurdles. The goal of these programs is to provide a bridge to these employees and businesses while the economy is in a forced shutdown. The nearly 10 million increase in jobless claims the past two weeks is a stark indicator that the support is needed. We would expect the claims numbers to continue rising sharply in the coming weeks. There is already talk of an additional stimulus package, but with each incremental stimulus bill we would expect the level of contention to increase in Congress.
Oil has rallied the last couple sessions with some optimism that an agreement can be made to reduce oil production and stem the massive rise in inventories and offset the lost demand as economies globally are on hold with the coronavirus. Storage tanks and oil tankers are filling rapidly, and we are quickly running out places to put the excess production. Without cuts we will quickly hit full capacity. With the demand destruction occurring from the global social distancing exercise, it will take time to work down the excess inventories. Even with production cuts, if the global economic hiatus continues into May there is further price risk to the downside.
Looking forward we would expect the markets to remain moody and data dependent, reacting to every datapoint coming out, whether it is from the health or the economic viewpoint. Volatility is down from peak levels but remains elevated. We would expect this to remain the case for some time and would not be surprised to see it increase during the earnings reporting season that is approaching. We do not view the equity markets as overly cheap, especially with the interim rally we have experienced. The improved credit markets are a positive for both companies and investors. We continue to reinforce that in times of stress, investors should follow their investment plan and not attempt timing the market. If you are uncertain about your plan and level of risks you are taking, speak to your advisor.
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