Here we analyze a selection of third-party news articles—both those we agree and disagree with.
Please note: Though we make every effort to source articles from freely available sites, we will also regularly include articles on sites that have limited content for non-subscribers. Doing so is increasingly unavoidable, as more and more financial media is published behind paywalls.
MarketMinder’s View: This article captures many of the prevailing market-related headlines today. For example: Stocks’ recent rally isn’t based on economic fundamentals; the market will test new lows; the eventual economic recovery will be slow; and a second coronavirus wave looms, with potentially even more dire consequences. All of these scenarios are possible, and we won’t know the bear market’s official end until we are well into a new bull. However, market participants are also well aware of these forecasts, estimates, fears and predictions—and their decisions to buy and sell stocks likely reflect them. Said differently, today’s widely discussed worst-case scenarios aren’t likely to surprise stocks. Moreover, it is normal for headlines to dwell on the supposed next shoe to drop during a bear market—and well into the new bull market. Waiting for positive headlines—an all-clear signal—is risky for investors since bull markets don’t begin once the news starts to warm up. Or, as legendary investor Sir John Templeton put it, “bull markets are born on pessimism.” For long-term, growth-oriented investors, preparing to be bullish when you least feel like it is a major challenge—but necessary to reap a bull’s long-term gains.
MarketMinder’s View: Nations around the world, from Austria to South Korea, are beginning to ease some of their shelter-in-place orders to allow businesses and individuals to get back on the path to normalcy. This week, the US—which is further behind the epidemiological cycle than Europe—alluded to its plans to reopen the economy. Note: Nothing here is set in stone, dates are fluid and responses will likely vary based on the state. However, to give a sense of what policymakers are tracking, this article highlights four conditions a community must meet before reopening: a “genuinely low” incidence of infection, a system to monitor and detect infection and a health system ready to respond with necessary equipment and staff to meet a potential surge in cases. Read on for more details if you are interested, but as China showed after emerging from its COVID-19 economic shutdown, getting back to business is a matter of when, not if.
MarketMinder’s View: There is some discussion of domestic German political developments here, which we won’t opine on: MarketMinder is politically agnostic, favoring no party or politician, and presents this article for the points on potential market and economic impact. In that vein, Germany appears to be following the lead of other European countries in slowly reopening its economy: “Hailing latest figures indicating a slowing down of the infection rate as a ‘fragile intermediate success’, [Chancellor Angela] Merkel said on Wednesday evening that teaching at schools across the country would start again from 4 May, initially for students in their final years of primary or secondary school. Hairdressing salons will also be allowed to reopen on 4 May if they take special steps to guarantee customers’ hygiene. Shops of up to 800 square metres in size, as well as bookshops, bike stores and car dealerships, will open again from this coming Monday.” Importantly, nothing is definitive yet, and as this piece notes, 16 state premiers will have some say on the exit strategy from Germany’s COVID-19 economic shutdown. Still, these vague political discussions offer some evidence life may be on its way to normalcy. For more, see our 4/6/2020 commentary, “A Ray of Light From Austria and Denmark?”
MarketMinder’s View: March’s “Retail sales fell by a seasonally adjusted 8.7% from a month earlier, dwarfing the previous record decline of 3.9% registered in November 2008, when the economy was in the teeth of the financial crisis. ... Industrial production—the combined output of the country’s factories, utilities and mines—fell 5.4% from February. That was the biggest drop since January 1946, when the U.S. economy was coming off its World War II footing.” Outside a handful of categories that rose due to COVID-19-related restrictions (e.g., grocery story and online sales), these widely watched US economic reports provide some finer detail on a historically bad month for data. Considering shelter-in-place orders remain in effect through at least this month, April data will likely be similarly weak. For investors, though, keep in mind stocks look beyond the next month or two—they generally anticipate the likely economic activity over the next 3 – 30 months. An awful April and Q2 aren’t likely to surprise markets, given the widespread discussion of the matter. What matters more at this juncture isn’t the depth of the near-term decline, but how long closures last. As uncertainty falls on that front, stocks should be able to better anticipate the longer-term recovery.
MarketMinder’s View: Please note MarketMinder doesn’t recommend individual securities; the companies mentioned in this article only serve to illustrate a broader point. COVID-19-driven shutdowns have hit airlines hard, with some measures showing passenger traffic off -95% since early March. To aid the industry through this rough patch, “individuals close to the discussions, who were not authorized to speak publicly, said under the terms of the deal 70 percent of the money would be given to the airlines outright and 30 percent would have to be paid back to the government. In addition, the government would be given warrants equal to 10 percent of the amount the carriers receive, these individuals said.” To the extent this lifeline helps the airline industry stay afloat during an institutionally induced economic shutdown, great. But the deal doesn’t generate any new economic activity, and importantly, this money won’t get grounded planes back in the air. The biggest benefit would be easing and removing COVID-19 restrictions and allowing businesses to get back to, well, business. Mostly, we think the main significance is the clarity investors finally have on how—and how much—the government will take an equity stake in the companies it aids.
MarketMinder’s View: Tracking sentiment during a bear market can provide a sense of where expectations are relative to reality. When the former fall far below the latter, it sets the stage for forward-looking stocks to recover. Timing the exact point of liftoff is impossible—short-term sentiment swings are unpredictable—but new bull markets usually begin when pessimism is near universal and gauges are historically low. With that in mind, this article presents one widely followed survey of professional fund managers: “The average manager now has 6pc of their portfolio in cash, up from 5pc in March. The survey authors, Bank of America Merrill Lynch, said the new cash position was significantly higher than the average of 4.6pc over the past decade. ... The principle concern among fund managers is a second-wave of the disease coming back after restrictions on movement are lifted, causing a repeat market fall and prolonged global recession. Professional investors have hit ‘peak pessimism’, the bank said, with nine in 10 of the respondents anticipating a global recession – when GDP falls in two consecutive quarters – this year.” While a COVID-19 relapse is possible, this shows markets are already fathoming that potential reality, helping reduce its surprise power. We aren’t saying the bear is over—that will be clear only in hindsight—but history shows deteriorating sentiment is common at the downturn’s end.
MarketMinder’s View: According to the IMF’s revised 2020 economic outlook, “It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.” Moreover, “A longer pandemic that lasts through the third quarter could cause a further 3% contraction in 2020 and a slower recovery in 2021, due to the ‘scarring’ effects of bankruptcies and prolonged unemployment.” We don’t highlight this to argue the IMF’s forecast is right or wrong—only time will tell—but to point out that like all forecasts, it is an opinion based on a certain set of presumptions and biases. Markets digest this and all other opinions when forming expectations about the economy’s likely path over the next 3 – 30 months. Increasingly dismal projections like this one help set those expectations lower, raising the potential for reality to beat them—hence why bull markets typically begin while pessimism is peaking.
MarketMinder’s View: This article argues US stocks’ rise since March 23 is at odds with likely terrible forthcoming earnings reports, and this bear market could set new lows once the extent and duration of the damage is clear. We agree further declines are possible, and COVID-19-related business restrictions probably wreak havoc on firms’ profits in the near term. But we wouldn’t presume this will come as a shock to markets. Headlines have projected earnings woes for weeks. Moreover, while most S&P 500 companies have withdrawn their forecasts, stocks don’t rely wholly on them (or analysts’ predictions) to assess future economic conditions—particularly since companies frequently use them to tamp down expectations, thus lowering the bar for the final figures to clear. That said, this downturn’s novel source likely makes it tougher to gauge the scope of the impact on businesses, which is why the range of forecasts is so huge. “The picture may begin to clear as companies begin to report their results for the first quarter and offer guidance about what to expect for the rest of the year.” Indeed—regardless of the results, just getting more information about COVID-19 containment’s toll should help markets adjust expectations going forward, reducing uncertainty. For more, see yesterday’s commentary, “Our Guidance for Q1 2020's Earnings Season.”
MarketMinder’s View: Here is a pretty balanced look at China’s March trade and lending data. First, while exports contracted much less than in January – February (-6.6% y/y versus -17.2%), COVID-19 containment measures in the US and Europe likely depress demand for Chinese goods in April. Conversely, imports’ modest decline (-0.9% y/y versus -4.0% in January – February) “adds to other evidence that the Chinese economy, while still hurting, is slowly reviving. And the real improvement in imports was probably even larger than it looks, because prices for so many key items fell sharply in March.” Since China appears to be on the other side of its coronavirus outbreak—and imports reflect domestic demand—its experience may hint at how domestic demand might return as lockdown orders loosen elsewhere. (Though the uptick in new cases, reportedly tied to people returning from overseas travel, may present a wildcard.) Second, a broad measure of lending growth accelerated to 11.5% y/y in March from 10.7% in February, suggesting monetary moves aimed at softening coronavirus countermeasures’ economic toll are having an effect. “New bank lending and corporate bond issuance led the rise, rather than government borrowing—which is encouraging, since it means businesses are taking the initiative, rather than wasteful state spending.” None of this is super meaningful to forward-looking stocks, which don’t wait for improving data to rise (or vice versa). But we think it is worth noting anyhow.
MarketMinder’s View: This piece describes the plight of investors in non-traded real estate investment trusts (REITs)—which, unlike their exchange-traded brethren, are highly illiquid. Hence, invested dollars may not be readily available—something many investors are discovering now as non-traded REIT funds halt redemptions amid high demand and property market turmoil. “The funds cite a range of reasons including the need to save their capital, the difficulty in valuing real estate and tenants halting rent payments as they struggle with the economic shock waves from the pandemic.” These may be sensible rationales for temporarily blocking withdrawals—for example, some funds “would have to start dumping property into a dysfunctional market at big losses to honor all their requests.” But the inability to cash out when you may most need the money is a major drawback versus their much more liquid, traded counterparts.
MarketMinder’s View: Last week, amid rising COVID-19 cases, Japanese Prime Minister Shinzo Abe announced a state of emergency that permits prefecture governors to request people stay at home and businesses shut down. Including the titular three, six prefectures have now done so and a seventh appears on the cusp. Collectively, they account for 44% of Japan’s population. “The requests apply to commercial facilities that handle nonessential goods and entertainment facilities, urging them to close through May 6, when the state of emergency is slated to end.” While local governments don’t have the authority to punish noncompliance, many businesses had already closed voluntarily, suggesting more probably do so now. Given Japan’s reliance on (currently sinking) external demand for growth, a second straight quarterly GDP contraction—meeting one common definition of a recession—already seemed likely in Q1. A new wave of business closures would get Q2 off to a poor start. None of this is good news, but Japan’s economy wasn’t at the forefront of global growth before COVID-19’s emergence. A potentially prolonged Japanese malaise wouldn’t prevent recovery elsewhere, in our view.
MarketMinder’s View: Sentiment surveys are anecdotal, but the Gallup poll highlighted here at least hints at how investor sentiment has morphed during this bear market. While a majority of investors say they are remaining in stocks in anticipation of a recovery, their expectations for the timing of said recovery have shifted: “‘As the covid-19 crisis stretches into a second month with no end in sight to current business closures and sweeping social distancing recommendations, investors have grown less optimistic about how soon the market will recover once the coronavirus crisis ends,’ [Gallup Senior Editor Lydia] Saad wrote in a post about the Gallup survey results. ‘Whereas in mid-March, 55% of investors predicted the stock market would bounce back quickly after the crisis and 45% thought it would take a long time to recover, today those figures are reversed: 45% say it will bounce back quickly and the majority (55%) say it will take a long time to recover.’” This gauge is, of course, only one of many—some of which, like the American Association of Individual Investors’ survey, have had more bearish readings lately. But both show something normal: folks becoming more pessimistic as a bear progresses. The end generally comes when that pessimism goes too far, making it easier for reality to beat expectations.
MarketMinder’s View: This argues that not only will COVID-19 permanently alter social behavior—creating a lasting economic impact—but that the bear market and economic contraction resulting from containment efforts will reduce risk-taking, particularly among younger folks. This argument is common during bear markets. We have seen numerous pundits make similar claims about Millennials following 2008, but studies following their financial habits show they have ratcheted up their stock investments over the years, and they are starting businesses left and right. The Tech Bubble’s implosion didn’t deter venture capitalists or founders from continuing to take risk on new ideas in the 2000s and 2010s. Even further back, some of America’s most successful companies were started by folks who lived through the Great Depression. Often, rather than destroying risk-taking, crises spur the bright ideas that prompt people to start new businesses. So we have our doubts that the scars of this downturn will be any deeper than those that preceded it.
MarketMinder’s View: Countries are about to start reporting Q1 GDP, and when they do, it could create confusion among those who don’t normally follow economic data and don’t know the quirks in how different countries report. The US and Japan report the seasonally adjusted annualized growth rate, which is basically the quarterly growth rate extrapolated over an entire year. European nations skip that step and simply report the seasonally adjusted quarterly growth rate, which is just the percentage change from one quarter’s output to the next. As a result, the numbers published in America and Japan are typically larger than those coming out of Europe. In good times, that can create the illusion of slower European growth. This time, it could give the impression America is in freefall relative to the rest of the world. That is already the impression some folks are getting due to the GDP forecasts making the rounds, including the one referenced in the title. But: “What all these people are actually predicting, though, is that GDP will fall about 7.5% (30% divided by 4) in the second quarter. That would still be really awful — in the worst quarter of the quite terrible 2008-2009 recession, real GDP fell 2.2% on a non-annualized basis. But during that recession, GDP declined in four other quarters as well, for a total peak-to-trough drop of 4%. If the U.S. economy grows again in the third and fourth quarters, which it can do even if life is still far from normal just because it will be starting from such a depressed base, that’s a hopeful but not delusional target for 2020’s full-year GDP decline. Over the course of the Great Depression, by contrast, real GDP fell 26%.” Keep this math in mind as GDP reports trickle out.
MarketMinder’s View: Days after Denmark and Austria announced plans to gradually end lockdowns, hard-hit Spain is starting to lift restrictions. Construction and manufacturing businesses are now allowed to reopen, while shops and restaurants may get the green light in two weeks. The more countries in Europe reopen, the more it shows the light at the end of the tunnel for America, which is running a few weeks behind. If countries there are able to resume normal life without infections skyrocketing, it augurs well for restrictions lifting here, easing the economic impact much quicker than many seem to envision today.
MarketMinder’s View: According to the latest government rumblings, Her Majesty’s Treasury is working on patching another hole in its COVID-19 response plans: startups, which aren’t eligible for prior financing programs. Officials are reportedly working on a program that would match private investments with public money, giving the government an equity stake in startups (likely through the British Business Bank). Like all prior COVID-19 response measures, this isn’t stimulus in the traditional sense, as it doesn’t forcibly create demand where none existed. Rather, it is another series of bailouts aimed at seeing companies through a funding dry spell. Beneficial, but not the sort of thing that will turbocharge a recovery.
MarketMinder’s View: As nations globally attempt to stem the COVID-19 pandemic, one of the hardest-hit countries appears to be turning a corner: Italy. This comprehensive piece details Italy’s experience, from its initial virus response to how its containment approach compares to other countries’. A lot of it is sociology, which markets generally look beyond. However, we share the article because it offers a potential preview of what awaits the US and other developed nations—which are lagging Italy on the epidemiological curve by a couple weeks—as conditions improve. “New infections are declining, the number of people needing intensive therapy and other hospital care is stabilizing, and even the daily death toll is finally trending down. ‘We have begun to see the light at the end of the tunnel. We can touch it,’ said immunologist Alberto Mantovani, scientific director of the Humanitas hospitals in Milan and Bergamo.” America’s experience probably won’t echo Italy’s or China’s exactly—and it may take some time for businesses and citizens to recover—but we are confident brighter days will eventually arrive here as well.
MarketMinder’s View: The Fed has announced new measures—these to the tune of $2.3 trillion—targeted at small and mid-sized businesses as well as local governments. Some of the high-level numbers include up to $500 billion in municipal bond buying as well as a new facility to get up to $600 billion in loans to businesses. The central bank is further expanding its role as lender of last resort to recipients beyond its normal purview (i.e., banks), and the Fed head’s latest comments appeared to confirm as much. “Fed Chair Jerome Powell said the demands of the crisis have led the central bank to broaden its role beyond the usual focus on keeping markets ‘liquid’ and functional, to helping the United States get the economic and financial space it needs to fix a dire health emergency.” In the here and now, these efforts amount to lifelines for those roiled by COVID-19-related disruptions—likely beneficial for those in need who are able to access the programs. However, we are monitoring these developments for their potential long-term monetary policy—and possible political—implications as well.
MarketMinder’s View: About 6.6 million people filed unemployment claims in the week ending April 4, adding to a historic, ultra-high three-week streak. Weekly jobless claims provide a sense of COVID-19’s sudden hit to the US economy last month—to say nothing of the millions of personal hardships. Many experts are forecasting worse labor data to come, like a double-digit unemployment rate and millions more job losses. We don’t know the specific numbers, but we agree with the upshot: Economic data will likely be poor for a while. But from an investing perspective, it is critical to separate your economic and market views. Stocks are leading economic indicators, incorporating all widely known information in real time. Unemployment data give us details, but stocks don’t move on past details—they are looking ahead. Keep that in mind, especially with April likely to be chockfull of bad economic news. For more, see our 4/3/2020 commentary, “What to Make of the March Jobs Report.”
MarketMinder’s View: In our daily review of market headlines, we have noticed a recent uptick in articles suggesting investors should view stocks’ recent rally skeptically. Their common argument: Policymakers’ huge support measures have temporarily buoyed stocks, but the ride will be fleeting. As summed up here, “[Stocks’] valuations now downplay the immediate threat of big hits to corporate earnings, while also underestimating the longer-term consequences of the worst pandemic in a century. … So any market recovery is likely to be lopsided. Assets divide into those that are actively supported by central bank buying—and then the rest. That means equities, while certainly boosted by low government bond yields, could easily set new lows before the worst of the economic and earnings downgrades are past.” Beyond the misperception, in our view, that markets need saviors, this analysis exemplifies what we refer to as “the pessimism of disbelief”—not fathoming that a nascent recovery could be real. This sentiment is common early in bull markets, when investors are generally feeling their most pessimistic about the future, so expect to see more of it. Note: We aren’t saying a new bull market has started, as that will be clear only in hindsight. We entirely agree stocks’ rise since late March could be a bear market rally, with more pain in store. Short-term returns are always unpredictable, and there are even more wildcards than usual now. But for long-term investors, take note now: The next bull likely begins amid extremely dour, not optimistic, headlines.