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.


Separate Your Stock Market Views

Following the worst Q1 in history, stocks started Q2 on a rocky note as investors seemingly reckoned with the White House’s grim COVID-19 projections. Even as fresh data showed infection rates slowing in badly hit Italy and Spain, the large numbers of forecasted deaths in America may have understandably hit sentiment. We will leave it to the epidemiologists to assess whether these projections are likely to prove accurate as social distancing protocols remain in place for another month. As ever, our concern is capital markets and our readers’ financial futures. To that end, we offer a simple piece of advice: To navigate markets at this juncture, it is vital to mentally separate the disease, containment efforts’ economic impact, and stocks. The three are unlikely to move in lockstep, in our view, with stocks likely to improve before the other two.

Because this bear market materialized with record-breaking speed, it can be hard to see that markets actually worked as they usually do, pricing in the near future before the facts on the ground confirmed it. World stocks peaked on February 12. At the time, there were a handful of confirmed cases in America and Europe. No developed nations were officially on lockdown yet, but on that date the Mobile World Congress in Barcelona became the first major event to get canceled. One month later, the MSCI World Index officially crossed into bear market territory. By then, Italy was mostly locked down, while America and most other nations were curbing mass gatherings. Concerts, festivals, sporting events and other major gatherings were canceled, but businesses were still open and shelter-in-place orders had yet to take effect. Those came fast and furious the following week, starting in California on St. Patrick’s Day and then eventually spreading to the East Coast. But the first data confirming a deep economic contraction didn’t come until IHS Markit’s Flash Purchasing Managers’ Indexes for March arrived on March 24. That happens to be the day after the MSCI World Index notched its year-to-date low. Now, we have no idea if this low will hold. But that isn't our point. Rather, we think this stocks' downdraft preceding any confirming data proves stocks' strong tendency to move before data.

This is why we think it is critical, if challenging, to separate medical statistics and projections out of your stock market analysis. The big numbers in the White House’s projections on Wednesday morning have floated around the medical community and mainstream news outlets for the past couple weeks. They may be new to an official government PowerPoint presentation, but they are not new to investors. People have been buying and selling for several days with knowledge of these numbers, registering their opinions about them. Hence, we suspect they are already reflected in stock prices, alongside the initial sharp economic contraction stemming from the efforts to contain them.

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From Lows to New Highs: Historical Stock Market Recovery Times

When stocks endure a rough stretch, sometimes one of the biggest sources of discouragement for investors isn’t what they see in headlines. Often, it is simple math: However much stocks fell in percentage terms in a bear, they must achieve a much greater return on the way up in order to break even. Thus far, this bear market’s biggest drawdown was -34.0% for global stocks, notched in just five and a half weeks.[i] To simply get back to breakeven, world stocks would have to rise 51.6% from the low and 29.7% from Monday’s close—and that presumes there isn’t another downdraft, which is utterly unknowable.[ii] Compound that uncertainty with the fact that global stocks have historically achieved an 8.8% annualized return since the MSCI World Index’s inception, and the future can seem daunting.[iii] But it needn’t be. Not only are average bull market returns far above stocks’ overall long-term average, but much of the gain typically comes early. Don’t discount the strong potential for stocks to be back at new highs sooner than anyone thinks possible.

To illustrate this, we will explore history using S&P 500 data, as it has the longest available reliable dataset. Exhibit 1 shows the time stocks took to break even in price terms following every market trough since 1926.

Exhibit 1: Stocks’ Recovery Times After Bear

Source: Global Financial Data, Inc. and FactSet, as of 3/31/2020. S&P 500 Price Index, 12/31/1925 – 3/31/2020. Table counts months as 30.5 days and rounds to the nearest full month.

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Would a Short Selling Ban Help—or Hurt?

During this bear market, like the last one, short selling has drawn many folks’ ire, with some arguing it exacerbates daily volatility and deepens markets’ decline. Already, some governments are taking action, with six European countries banning it for selected stocks and South Korea doing so across entire industries. Now some propose a similar ban in America. In our view, however, short selling isn’t driving volatility and it isn’t behind the drop. We think banning it is a solution seeking a problem—a move that could create issues of its own by reducing market liquidity.

Short selling is the practice of borrowing stock, selling it and (later) buying it back. If stocks fall in the meantime, you profit. Usually, this is done by hedge funds, market makers and high-frequency trading firms. Today, as in 2008, many who don’t employ this practice see it almost as profiteering—and blame it for adding to downward pressure on stocks. They claim short sellers flood the market with sell orders, stoking big daily drops fundamentals don’t justify—profiting in the process. Hence the calls to ban it. In the financial crisis, US and other regulators heeded similar calls, temporarily restricting short selling across a variety of Financials stocks. They also permanently eliminated the practice of “naked” short selling, in which traders sell nonexistent shares instead of borrowing real shares up front. So far, US regulators haven’t yet bent to pressure to ban short selling—and that is a good thing, in our view. We think the negative light so many see shorting in doesn’t really reflect reality.

In the ultra-near term, perhaps a rash of short selling could temporarily swing prices a bit. But in the longer run, we are skeptical it has much impact. For one, there is a buyer on the other side of that short sale—one who is taking literally the opposite view, no less. The number of sellers (or buyers), therefore, doesn’t dictate market direction meaningfully. The stock market is an auction marketplace in which buyers and sellers express their views about where prices are headed by bidding for stocks. In our view, treating short sellers as uniquely capable of influencing stock prices presumes their opinion is always right and ignores other market participants’ role in influencing prices.

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Some Basics to Help Keep Would-Be Madoffs at Bay

As investors deal with the challenges of a bear market—already a tall order—they must also be on guard against another threat. This one comes from their fellow humans, unfortunately. While fraudsters are always active, many of their plots come to light and make headlines during bear markets—like Bernie Madoff’s famous 2008 Ponzi scheme, which emerged only after the big bear market led many of his clients to seek withdrawals. But sharp volatility can also sow the seeds of future schemes, as many investors’ frazzled nerves have them clamoring for “safe” investments with good returns and no downside. With that in mind, we think it is worth remembering how these plots generally look—and how you can protect yourself.

Stocks’ historic March plunge has roiled many investors’ portfolios—and their emotions along with it. After global stocks entered a bear market in three weeks, many probably feel the pull of something “safe” and steady—a way to earn equity-like returns with less, or no, downside risk. Yet this is a fantasy. No financial product can provide returns approaching stocks’ without risk, in our view. Yes, some salespeople claim products like indexed annuities, for example, deliver that. But their returns are usually far from equity-like over meaningful time periods, undercutting the claim.

Setting those legal-if-suboptimal (in our view) tools aside, many scammers use similar rhetoric to pitch fancy strategies and tactics featuring relatively high upside and, critically, no downside. Consider: Since 1985, the MSCI World’s average annualized return is 8.4%.[i] A fraudster may say their product delivers a return that is a shade under that average, but, temptingly, without any of the associated negative volatility. Or perhaps they claim their strategy combines a proprietary process with “alternative investments” nobody else is using—allowing them to remove the downside risk. Madoff’s “split/strike conversion” strategy, for example, involved buying and selling options on a portfolio’s stock holdings—and drove high and consistently positive returns. Illuminatingly, nobody could replicate his results, which is probably because they weren’t possible.   

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Around the World in Coronavirus 'Stimulus'

While the US’s $2 trillion stimulus bill is hogging headlines stateside, governments around the world are rolling out their own sweeping rescue packages in an effort to mitigate the economic consequences of COVID-19 containment efforts. Here is a look at some of the major responses we have seen from North America and Europe thus far. This isn’t everything worldwide, and many more provisions may emerge or shift in the coming days. But it should give you a sense of how the globe is responding and what investors should reasonably expect from it.

UK

Britain’s government has rolled out a sequence of measures.


Sources: Bloomberg and The Guardian, as of 3/26/2020.

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Putting Historic Jobless Claims Into Perspective

Thursday morning, the Labor Department’s widely anticipated initial jobless claims report confirmed what almost everyone expected: New claims for unemployment insurance skyrocketed in the week ending March 21—hitting 3.28 million. This far surpasses its previous 695,000 record high in October 1982 and the last recession’s late March 2009 high, 665,000. It also surged from a historically low level the prior week, illustrating the speed at which the business disruptions caused by the coronavirus response are hitting the economy. (Exhibit 1) From here, we expect most labor market metrics to deteriorate—especially if the business interruptions persist for long. For those affected, this is a personal tragedy. But for investors, it is worth remembering that employment data are late-lagging—unlikely to forestall any market or economic recovery.

Exhibit 1: Unprecedented Job Losses

Source: Federal Reserve Bank of St. Louis, as of 3/26/2020. Weekly initial jobless claims, 1/7/1967 – 3/21/2020.

Many believe this week’s record high is only the tip of the iceberg. Last week’s unemployment filing tsunami overwhelmed many states’ websites, preventing some individuals from claiming benefits. There were also more furloughs and layoffs this week, and the new coronavirus stimulus act will allow gig workers and other freelancers to file (if it passes the House in its current form). Others who are out of work may simply take a little time before filing. Hence, observers expect a high level of claims throughout April, driving the unemployment rate up massively. As such, many fear unemployed consumers can’t spend, and with US GDP roughly 70% consumption, they figure it will hamstring growth and create a downward economic spiral that saps stocks, too.

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What Is in That Big 'Stimulus' the Senate Just Passed?

After its first few attempts to pass stimulus legislation failed last week, the US legislature got together and crafted a bipartisan bill Wednesday, which the Senate passed 96 – 0 that evening. The House is slated to vote on the bill—called the Coronavirus Aid, Relief and Economic Security (CARES) Act—on Friday, and President Trump has already said he will sign it. Most headlines hype this as a $2 trillion plan to blunt the effects of the coronavirus-related interruptions to business and everyday life, with lots of folks debating whether or not it will prove sufficient. Many others are already debating the wisdom of specific provisions. Here is a look at those provisions—although we will let you conclude whether they are wise or not. Wherever you fall on that, remember: Regardless of the wisdom of the initial allocation of cash, it eventually finds its way into the hands of businesses and individuals that spend it better. So while we don’t think this plan is likely to be a cure-all for the COVID-19 restrictions that ail the economy, it does look set to turbocharge the recovery that would likely have come eventually anyway.

We won’t cover every provision in this bill—which isn’t actually possible now anyway, as the full text only became public this morning and weighs in at a whopping 880 pages. However, we can detail some major provisions now. Without further ado, here they are:

Households will receive checks, subject to income limits. In the coming weeks, the IRS will begin disbursing payments to Americans with individual income up to $75,000 ($150,000 per couple) in the amount of $1,200 per adult and $500 per child. Every $100 earned above those marks reduces the payment by $5.[i] Math-whiz readers will likely readily see that means individuals with incomes of $99,000 and up won’t be getting a check. Ditto for couples with greater than $198,000 in income. These income limits are based on 2018 tax returns, unless you filed for 2019 already.[ii] 

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Corporate Debt Fears in Perspective

As stock markets fell over the past few weeks, a parallel fear emerged: a wave of corporate bond defaults, particularly in the high-yield (aka junk) segment. Investment-grade and junk yields spiked to their highest levels since the end of the last bear market, sparking visions of companies unable to refinance debt without breaking the bank. Couple that with high issuance in recent years, and headlines are sure a long-feared corporate bond bubble is finally bursting. While we think it is reasonable to expect some defaults—particularly the longer the interruptions to business persist—we think a closer look at the issue should help assuage those broader debt crisis fears.

First and foremost, we think a little historical perspective is in order. Corporate bond prices can correlate highly with stock prices over short periods. Since bond prices move in the opposite direction as yields, it isn’t abnormal for corporate bond yields to spike during a stock market downturn. Notably, as Exhibit 1 shows, the spike thus far pales in comparison to the 2007 – 2009 bear market, which didn’t include a massive wave of high-quality bond defaults.

Exhibit 1: A 15-Year Look at Corporate Bond Yields

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Early March Data Echo Stocks' Downturn

For the past five weeks, stocks have been quickly pricing in the escalating likelihood of a global recession stemming from the world’s efforts to contain the spread of COVID-19. Now, courtesy of IHS Markit’s Flash March Purchasing Managers’ Indexes (PMIs) for major developed nations, we have the first economic data read on the situation. In a word, it is awful, making this a crucial time to remember stocks typically lead economic data, not the other way around.

PMIs are surveys, conducted monthly, of thousands of private businesses. Each business reports whether activity rose, fell or held steady versus the prior month in a handful of categories—including output, new business, new export business, employment and supplier delivery times. They also report on squishier indicators including expectations for future business and prices. IHS Markit then compiles all the responses into headline indicators for manufacturing, services and a composite of all businesses. Readings correspond to the percentage of businesses reporting expansion, with results over 50 generally signaling economic growth and under 50 implying contraction. These aren’t perfect indicators, as they don’t measure the magnitude of that growth or contraction. But they are timely, and the flash readings—early tallies containing about 85% of responses for the month—are especially so. Hence, we find them quite useful.

With that explainer out of the way, Exhibit 1 displays this month’s flash PMIs. Please take a deep breath before looking.

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Meanwhile, Back at the Fed ...

The Fed reached back into its bag of tricks Monday morning, releasing a new slew of measures aimed at boosting liquidity in financial markets and credit to businesses under stress from COVID-19 containment efforts. On the bright side, they seem to have learned from the panic their announcement last week created, and refrained from announcing the new moves on a Sunday. But as with the prior sets of crisis-related actions, we think these new programs are an overall mixed bag that raise some longer-term questions.

As is usual with Fed announcements, the official releases and associated news coverage came with a lot of jargon. So here, for your convenience, is a (hopefully) simple roundup of everything they did:

  • Expanded the new round of quantitative easing (QE) asset purchases from $700 billion ($500 billion for US Treasury bonds and $200 billion for mortgage-backed securities) to an unlimited dollar amount, running indefinitely
  • Created a new facility to purchase investment-grade corporate bonds and investment-grade corporate bond ETFs
  • Tweaked bank capital rules so that banks will not be penalized and forced to constrain lending if their capital ratios fall below the regulatory minimum
  • Announced unspecified “new programs” to directly finance “employers, consumers and businesses” with up to $300 billion, with the Treasury kicking in $30 billion
  • Created the “Primary Market Corporate Credit Facility” to buy bonds and lend directly to large investment-grade companies
  • Revived a 2008-era program called the “Term Asset-Backed Securities Loan Facility,” which will enable and fund the securitization of student, auto, credit card and Small Business Administration loans
  • Expanded some money market fund and commercial paper liquidity programs to include the purchase of municipal debt

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