Daily Commentary

Providing succinct, entertaining and savvy thinking on global capital markets. Our goal is to provide discerning investors the most essential information and commentary to stay in tune with what's happening in the markets, while providing unique perspectives on essential financial issues. And just as important, Fisher Investments MarketMinder aims to help investors discern between useful information and potentially misleading hype.


What Would a 'Second Wave' Mean to Markets?

As countries “flatten the curve” and politicians debate the best way to reopen economies, a new concern has started brewing: COVID-19’s potential “second wave” prompting renewed lockdowns later this year. While a second wave could happen, we think there are far too many unknowns about this possibility to let it factor heavily in your investment outlook, which should sway on probabilities.

A second wave could happen in a number of different ways. One, COVID-19 could come back during fall and winter. Experts aren’t exactly sure why, but influenza tends to strike during colder stretches, and COVID-19 could eventually behave with similar seasonality. Alternatively, the virus could mutate, becoming unrecognizable to most people’s immune systems—even those who already suffered from the first wave. Recent research indicates the coronavirus strain afflicting New York came from Europe rather than Asia—evidence of how the virus could change as it spreads over time. Still others think it is simply a matter of easing restrictions and social distancing too soon. Regardless of “how,” though, many pundits worry a COVID-19 return will again threaten to overrun health care systems and retrigger economic lockdowns. That could truncate any nascent economic recovery and/or prolong some interruptions to business and normal life.

Countries worldwide are concerned. While life in China has mostly returned to normal, officials there have imposed new restrictions in certain northern regions—particularly Harbin, a city of 10 million—after a spike in new infections locally. In Europe, Scottish First Minister Nicola Sturgeon warned people in the UK should prepare for sudden, unexpected lockdowns if a second wave occurs. UK Prime Minister Boris Johnson—officially back to work after falling ill with COVID-19 himself—echoed that sentiment, saying the government would have “to slam on the brakes of the whole country and the whole economy” if a new wave emerged.

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What Underlying Trends Say About This Bear Market

Bear markets—fundamentally driven declines exceeding -20%—usually take time to develop. Not so this time. While the average US bear market since 1925 took 8 months to hit the -20% mark, this one took 16 trading days—by far history’s fastest.[i] World stocks entered a bear market similarly quickly—20 trading days.[ii] This bear market’s speed is highly atypical—and is more in keeping with historical corrections (sentiment-driven moves of about -10% to -20%). Thus far, this bear market has another similarity to corrections: Leadership hasn’t shifted.

From the bear market’s beginning to now, growth and large-cap growth stocks have outperformed value and small-cap value. The MSCI World Index peaked February 12, falling -34.0% to its March 23 low.[iii] As Exhibit 1 shows, global growth stocks have beaten value by a whopping 11.9 percentage points over this same time period.[iv] The difference is even starker between large-cap growth stocks and small-cap value: 26.6 percentage points.[v] Now, this isn’t unusual on the downside in a bear market—smaller, value-oriented firms tend to be more sensitive to economic cycle shifts. Recession causes many investors to fear such firms won’t survive, causing them to trail in the decline. However, since the lowest point seen to date on March 23, large-cap growth is continuing to outperform small-cap value—unlike most recoveries from bear markets.

Exhibit 1: Large Growth Leading Small Value Throughout 2020

Source: FactSet, as of 4/23/2020. MSCI World Growth Index and MSCI World Value Index, both with net dividends and indexed to one at 12/31/2019. MSCI World Large-Cap Growth Index and MSCI World Small-Cap Value Index, both with net dividends and indexed to one at 12/31/2019. Each line plots the growth index divided by the value index. 12/31/2019 – 4/22/2020.

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What Rising Deficits Mean for US Debt

US federal spending is surging thanks to a series of aid packages designed to alleviate COVID-19 containment measures’ economic toll. With the deficit all but assured to spike, we already hear lots of chatter about runaway debt risking eventual economic ruin. In our view, though, US debt still isn’t a looming economic or market catastrophe.

The scale of 2020 fiscal measures—both past and planned—is indeed significant. Congress has allocated $2.2 trillion in emergency aid to date.[i] The House just passed another $484 billion package targeted at small businesses that President Trump is set to sign, and most expect Congress to direct additional funds to states and municipalities next month. The result is a ballooning 2020 deficit. The Congressional Budget Office’s 2020 debt forecast, released in January, projected a $1.0 trillion annual deficit.[ii] According to a Bloomberg analysis, existing fiscal measures alone plus falling tax revenue could lift this to $3.8 trillion, well beyond 2009’s record-high $1.5 trillion.[iii] COVID-19-related restrictions on commerce likely hit GDP this year, too, potentially lifting America’s debt-to-GDP ratio past its 1946 peak of 106%—the result of heavy borrowing to fund the war effort.[iv]

While recently passed new spending and bailouts are big, they aren’t all permanent balance sheet entries. $454 billion thus far backstops Fed loans to small businesses.[v] To the extent these are repaid, the money isn’t spent. The Fed will also return interest on those loans to the Treasury, as it does all its profits, further defraying the cost. Another $211 billion represents deferred—but not canceled—employer payroll taxes.[vi] Those measures representing actual transfer payments are also likely a one-time splurge, not a new, permanently higher spending plateau. After 2009’s big increase, annual deficits fell for six straight years.[vii]

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'Sell in May' Still Isn't Sound Strategy

As if investors need any more reasons to be gloomy these days, another is sure to start hitting headlines in the coming days: The calendar’s turn from April to May. “Sell in May and go away,” the adage says, citing stocks’ history of lower average returns in late spring and summer than during autumn and winter. This year, we suspect the bear market will heighten the chatter, with “Sell in May” touted as a way to protect yourself against the proverbial “next shoe to drop.” In our view, it is impossible to know what markets will do this summer—short-term volatility is unpredictable—and whether March 23 is the bear market’s low is unknowable today. However, seasonality is a poor reason to cut equity exposure, especially now.

For one, summer months’ weakness has always been overstated. The most common version of “Sell in May” focuses on returns from April 30 through Halloween. Those are indeed weaker, on average, than returns in the other six months. Yet at 4.2% since good S&P 500 data begin in 1926, they aren’t negative.[i] They just aren’t as positive as the 7.3% from Halloween through April 30.[ii] Yes, returns in individual years vary greatly, and the dataset spans bear markets as well as bull markets. Accordingly, don’t be shocked if pundits trot out the dismal May – November returns from 2008 or 2000 – 2002 as evidence you should sell now. The trouble with that logic is that those bear markets, like the one that began in February, had fundamental causes that had nothing to do with the calendar. Their extended length and multiple downdrafts had nothing to do with the calendar, either. Coincidence isn’t causality.

At the most reductive level, selling when May arrives and sitting out the summer results in one of two scenarios: You miss the bear market’s second leg down, or you miss its V-shaped recovery. (Yes, there are other scenarios in between, such as a flattish spell or a second downdraft and quick recovery, but we are trying to keep things simple.) If this bear market has material, longer-lasting downside ahead, it will likely have a fundamental cause. Correctly identifying that before the crowd does—and, hence, before markets have an opportunity to factor it into pricing—is crucial in any decision to reduce equity exposure. Absent that, selling just because summer months in bear markets have been awful—or because summer returns are lower on average—has the potential to be a costly error.

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Perspective on China’s Historic Q1 GDP Report

Last Friday, China reported Q1 2020 GDP fell -6.8% y/y, its first contraction since the country began reporting quarterly GDP in 1992. While this is no doubt a landmark event, it didn’t shock many. Analysts and economists widely expected a decline, to varying degrees, given the government essentially shut down the economy from late January through February to try to contain COVID-19. Some pointed out the drop was bigger than analysts anticipated, but those estimates were more like hugely disparate guesses, so we doubt that means much. Economists are now debating China’s growth prospects for the rest of the year, with most outlooks pessimistic. As many rightly point out, other major economies have virus-related restrictions in place now, and until eased, growth globally likely suffers—weighing on demand for Chinese goods. But besides the underlying details, we believe investors should also keep in mind how China reports GDP—methods vary, and comparing different countries’ headline numbers won’t always be apples-to-apples.

For historical context, here is a chart showing Chinese GDP growth since 1992.

Exhibit 1: Chinese GDP Quarterly Growth Rate Since 1992

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Don't Expect P/Es to Signal the Low

Stocks have staged a nice rally since their most recent bear market low on March 23, and we will be the first to tell you it is impossible to know whether this is a new bull market. Bear market rallies are common, and this bear market’s end will be clear only with several weeks’ or months’ hindsight. Accordingly, we think it is entirely sensible to question whether this rally has fundamental support, as several pundits have. However, the logic underlying many of these don’t trust the rally articles is suspect, in our view. If pundits aren’t calling it “Fed supported,” they are dwelling on valuations and warning price-to-earnings ratios are too lofty to signal that the bottom is in. In our view, this ignores some key points about P/Es. One, they aren’t a timing tool. Two, their behavior during bear markets is far from consistent, and their inflection points don’t always coincide with a bear market’s beginning and end.

Exhibits 1 and 2 show the S&P 500’s trailing P/E before, during and after the past two bear markets. As Exhibit 1 shows, anyone waiting for P/Es to fall well below their level at the Tech Bubble’s peak would have missed out on the ensuing bull market’s first year at least. As Exhibit 2 shows, during the bear market that accompanied the global financial crisis, P/Es were flat for nearly a year before soaring into triple-digit territory in its final three months. Waiting for them to bottom out would have cost you the bull’s first six months—a period when the S&P 500 jumped 54.6%.[i]

Exhibit 1: 12-Month Trailing P/Es and the 2000 – 2002 Bear Market

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Contrasting US and European ‘Reopening’ Plans

Late last week, the US and Germany announced plans to reopen their economies following weeks-long COVID-19-induced business closures—and the plans highlight rather different approaches. In short, Germany—and much of Continental Europe—seems to be moving faster than America’s very gradual, rather disjointed approach. It all highlights what we think is a matter worth watching going forward: the disparate progress toward lifting restrictions. We think this is key to the duration of business interruptions, which could drive either relief or disappointment for markets.

Last Thursday, citing slowing caseloads and ample hospital capacity, President Trump unveiled new White House guidelines for “reopening” America’s economy. The plan sets out a three-phase approach for states’ and municipalities’ lifting social distancing and other restrictions on business. But before they enter this, they must meet certain initial criteria, including:

  • Falling positive COVID-19 tests and cases over 14 days
  • Hospital readiness to cope with a potential resurgence in cases, including intensive care units
  • Widespread testing availability to find asymptomatic COVID-19 carriers
  • Tracing ability to track and contain emerging cases

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Tips on Protecting Yourself From Coronavirus Ne’er-Do-Wells

As the world battles COVID-19, investors must contend with another threat: bad actors using the pandemic to prey upon people’s emotions. Many of these schemes rely on fear, though some try to stir other feelings—like greed. Headlines in the US and overseas are already noting an uptick in COVID-19-related scams, and the number, unfortunately, will likely rise from here. Here is a roundup of some coronavirus-related scams and tips on how to protect yourself.

Several varieties of scams have caught US regulators’ attention. Some exploit disease fears specifically, like bogus testing kits, cleaning services or even treatments. Others are taking advantage of heightened demand for masks, hand sanitizer and other personal protection products by taking orders and not delivering the goods. Bad actors are also using official-sounding communications to frighten people into taking action, including voicemails warning of exposure to COVID-19 and email phishing scams that appear to be from reputable sources like the WHO or CDC. Moreover, with Treasury now sending out stimulus checks, crooks are finagling their way into that space, with phishing attempts claiming you must sign up or pay a fee to receive your payment. (More on this below.)  

On the investment side, the SEC has warned of coronavirus-related “pump and dump” schemes. The way it works: A promotor claims a company—usually a tiny microcap whose stock doesn’t trade much—is on the verge of a COVID-19 cure nobody else knows about, so now is the time to buy. As investors bid up the price based on these often-false claims, the perpetrators sell their shares. After reality emerges and the hype dies, the stock price falls—leaving those who bought in earnest with losses. Along with these scams, investors must also fend off offers of “safe” investment strategies or products that prey on frayed nerves due to recent volatility and the bear market.

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Why Investors Shouldn’t Chase ‘Coronavirus Winners’

With global stocks in a coronavirus response-driven bear market, many may be tempted to target companies with purportedly bright prospects despite—or perhaps because of—COVID-19. But in our view, doing so calls for caution. Many of the reasons these stocks have bucked the overall trend are very well known, suggesting investors need another, more forward-looking thesis to own them. Absent this, targeting coronavirus “winners” smacks of buying based on past returns—heat-chasing, which has burnt many an investor over time.

From this global bear market’s start on February 12 through March 23—its low to date, though more lows are possible—just 1.3% of MSCI World Index stocks were positive.[i] Just 0.3%—5 companies—were up by 10% or more.[ii] Perhaps that seems extreme, but in our experience, it isn’t that uncommon for bear markets. The few positive outliers have garnered much attention as “bear market safe havens” and “coronavirus winners.” This eclectic bunch includes streaming and videoconferencing services, e-commerce firms, grocery stores and their suppliers, producers of household goods like cleaning supplies, video game makers, networking software providers, a company that manufactures masks, a pizza deliverer and several healthcare firms.

It isn’t hard to see why these companies would be outperforming in the very bizarre circumstances we now find ourselves in—where large swaths of most developed economies are shuttered and governments are telling citizens to stay home as much as possible. More folks are ordering goods online, cooking their own meals, watching videos and gaming in lieu of gathering. Businesses still operating are upping their use of video conferencing as more employees work from home. Meanwhile, the hunt for a vaccine or treatment continues apace. In this environment, fleeing down stocks for these winners may be enticing.

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Rising US Unemployment Isn’t a Recovery Dealbreaker

US jobless claims have surged in the aftermath of the coronavirus shutdowns, with about 22 million workers displaced in just four weeks. Many portray this as a further bearish development for stocks, arguing it is a sign consumer spending and other economic drivers will worsen. This is an understandable theory, but we don’t think it passes muster.

Exhibit 1 shows US continued jobless claims alongside drawdowns in the S&P 500. As it shows, the labor market is a lagging indicator for stocks. While the US unemployment situation is ugly and a tragedy for those affected, the S&P 500 fell -33.9% from February 19 to March 23, the lowest point in this bear market to date.[i] The Russell 2000 Index, which tracks US small-cap stocks, fell -40.8% over the same stretch.[ii] These big declines arrived before jobless claims began surging—stocks seemingly anticipated the awful fallout.

Exhibit 1: US Continued Jobless Claims (through 4/4/20) and the S&P 500

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