Seaborn Hall, 3/09/20, updated 3/29/20, 8:30 am pdt
This post will be updated over the next month. Be sure to check back on a regular basis.
“Fear is spreading faster than the virus.” – Fox Business Analyst
“There is nothing to fear, but fear itself.” – Franklin D. Roosevelt, 1933 Inaugural Address
“If you’ve seen one financial crisis, you’ve seen one financial crisis.” – Unknown Financial analyst
“Buy when there is blood in the streets; sell when everyone is greedy.” – Warren Buffett
The Bottom Line (3/29/20, 8:30 am pdt)
The stock markets were up for the week since 3/20/20 close and ending 3/27/20. The DOW was up 12.84%, the S&P 500 was up 10.26%, and the NASDAQ was up 9.05%. However, this does not mean the crisis, or volatility, is over. Even with these weekly highs, the DOW was down over 4%, or 915.39, on Friday.
As of 3/27/20, Los Angeles County just announced a complete shutdown of all but ‘essential’ activities until April 12, 2020. President Trump signed a $2.2 Trillion stimulus bill for the US economy.
As of 3/26/20 there are a reported 3.2 million jobless claims in the United States due to the Coronavirus economic shutdown. President Trump calls Coronavirus ‘the hidden enemy’: from our perspective the President has been dealing with ‘hidden enemies’ since his inauguration, the virus is just the latest physical manifestation. President Trump today suggested that next week we will begin talking about when we will get America back to work. Various aid and stimulus packages passed by Congress have spurred the DOW index to an over 20% rise this week, propelling it back into ‘Bull’ market territory.
We expect that there will be continued fear and panic and stock market volatility for at least the next month – more likely, two months. Could there still be more downside? Yes, but it is likely that as of 3/26/20 that we are close to a bottom, or have hit bottom once and that things will stabilize here – unless there is a new surge of cases or ‘seeding’ of cases in new states or areas in the U.S.
According to Dr. Anthony Fauci and Vice President Mike Pence, it is likely that Coronavirus is 3x more contagious than the flu.
If the chart analysis in the video, right, is accurate – and it is a conservative estimate – as of 3/26/20 at 6:00 am pdt:
If there are 1036 deaths currently in the United States there are likely to be 1,657,600+ active infected people with Coronavirus – not the 67,377 that are reported (for state of CA, see below). Again, this is a conservative estimate based on data – there might be many more.
Again, this is a conservative estimate based on a low fatality rate – there might be many more. The anticipation of these future reported cases is most likely what continues to drive the stock markets down.
We would expect more downside – that the bottom already hit may be re-visited or slightly surpassed – as, and especially if, the number of infections and deaths in the US goes steeply up. Goldman Sachs recently suggested a major support level of 2100 for the S&P 500. At least one other source we know of – Scott Minerd of Guggenheim – has suggested this level as well. Whether or not we go that low – or more – depends on the US success with ‘social distancing’ and ‘flattening the curve’ – and when the nation is able to return to work in some capacity.
Stock markets could take as long as fifteen months to recover from these or lower levels. At present, we believe it will happen sooner. We believe that, though President Trump, the Administration, the CDC, etc may have made some minor mistakes, that largely Trump’s actions have and will save the United States from many infections and deaths.
For historical context, see our Coronavirus Comparison Page and compare this experience to the number of infections and deaths from H1N1 in 2009-2010 (stock market impact, chart, left). We are not even close to approaching those levels yet.
One caveat is that the contagious effect of Coronavirus is much greater than it was for H1N1 and the fatality rate – at least at present, it usually goes down as more cases are closed – is also greater.
The big question the markets are looking for at present is, ‘When does the virus in the US peak?’, and ‘When do virus levels in the US begin to level off?’ Guesses at present are sometime in late April-May, or possibly, June. When these questions are answered the markets will begin to stabilize.
As long as President Trump is reelected in Fall 2020 our long term view of the US stock markets and economy remains the same – largely positive, with the stock market returning to or close to prior highs. That said, there have been structural damage from this event that has increased the underlying faults in America’s economic framework that – without a sustained, landmark recovery during the next Administration – will likely create problems in the next decade or more. For more detail, see “How Do We Interpret This Moment?” section below. See our Coronavirus Epidemic Daily Update Page here.
Coronavirus, The Markets And The Economy – And Fear
As of March 16, 2020 this is now a classic case of fear and panic leading to real problems in the economy and downside in the stock markets.
Each financial crisis is different from the last one – this one, if it can be called that, is the same. There is certainly more to fear than just fear itself at this point, for whether the Coronavirus grows into a global epidemic that kills millions or not – that is the fear among investors and market participants, and that fear is producing structural impacts on the global markets and the economy.
As to the stock markets and whether to be a buyer or a seller at this point: Fear and panic – and legitimate fear that the panic will drive structural problems in the markets and the economy due to cash flow, credit problems, and future earnings problems – are driving the markets down. On the other hand, it is difficult to conclude that ‘everyone is greedy’ at present. A much saner conclusion would be that now is the ‘blood in the streets’ moment. But, because of the structural damage concerns, anyone who buys now is taking on risk. Global GDP will be affected at this juncture. What to do?
It is perhaps strange that markets are being driven in the opposite direction of 2009 now in response to Trump’s recent announcements of $50 billion in aid for small businesses, $200 billion in tax aids, help for those with health concerns, and further stimulus in the form of Quantitative Easing and bailouts. Is this mere panic or reason?
The historical virus Coronavirus should be most compared with is H1N1, the swine flu, from 2009 to 2010. H1N1 infected 1.4 billion globally, 60 million in the US, and killed 12,500 in the US – all in about one year’s time. Coronavirus has not come close to these statistics yet. However, Coronavirus is different and more scary for a number of reasons. (See Coronavirus CS Daily Update Page for more).
CS currently believes – largely due to early action by the Trump Administration and global actions to ‘flatten the curve’ – that the spread and affect of Covid-19 will be more similar to H1N1, but that US infections, hospitalizations, and deaths will be less. Globally, we believe they will remain slightly less. However, at this point there will be global economic and financial impact and repurcussions.
How Do We Interpret This Moment?
(updated, 3/23/20, 8:30 am pdt) See our updated Section on This Question, Here
CS views this event as a ‘mid-cycle correction.’
The Real Estate cycle is a documented, 18.5 year cycle that depends on Bank lending and the global leveraging cycle. The Australian economist, Phillip J. Anderson, has shown that in developing nations the real estate cycle stays in effect at all times over the last 200 years except during major world wars. The Stock Market lags the Real Estate Cycle slightly, so that if you refer to the chart to the right, the stock market should hit a high around 2026 and fall to its next low about 2029.
Additionally, ‘Innovation gains traction during tumultuous times’ (see the chart, below right).
We don’t see this as a ‘worst case’ moment – at least for the US – as the chart, below left, lays out. Along with continuing along the current cycle, and ‘blunting the virus curve’ through social distancing (see charts in Conclusion), we expect the chart on the right to win over the chart to the left. The markets are oversold at present and panic and fear has induced a ‘flight to safety.’ Software trading algorithms, pensions, and insurance companies – and retail investors driven by the memory of the GFC – have all piled in. This is a true ‘blood in the streets’ moment. Warren Buffett and Berkshire Hathaway are probably buying quality.
The Real Estate clock in the chart above reflects the movements of global economies and markets through the 18.5 year Real Estate Cycle. Where is the clock at present? We have not even clearly hit ‘rising interest rates’ and the easing of bank lending yet. This is a ‘Mid-cycle’ slowdown moment. Expect a brief pause and then resumption of the cycle back to where it was before – or higher. One caveat – the cycle never repeats exactly. As Mark Twain said, “History doesn’t repeat, but it rhymes.”
The Real Estate Cycle integrated with the Stock Market Cycle predicted the current downturn – and it predicts a subsequent upturn, as the chart in the Conclusion (at left, below), shows.
The one caveat to the above view is that this global pandemic is now somewhat similar to a ‘World War’ in that it is affecting almost 200 nations, shutting down economies, fundamentally changing finances, and killing thousands of people all over the world. That said, it is still not even close to the level of H1N1 in 2009-10 in terms of the number of infections or deaths. However, because of the contagious effect and the fear and panic created it is causing more severe economic impact.
At present, we need to monitor how this unfolds over the next few months to determine if this remains a ‘mid-cycle’ moment – or whether something fundamental has changed.
Interestingly, the late Christian prophet, John Paul Jackson, predicted that there would be a pandemic that would sweep the globe in the future. This virus would be typified by a red rash that would break out on the skin. He predicted another virus would come on the scene before this one occurred that would create fear and panic – but, it would not be the virus he was predicting. Is the Covid-19 virus the ‘virus before?’
Coronavirus, Global Viruses And The Stock Market
SARS occurred in 2002 soon after the terrorist attack on 9/11 and there was no visible effect on the markets since they were already down and SARS was mostly contained within China. MERS occurred in 2015 when the markets were in a consolidation period. MERS was largely contained within the Middle East. Again, there was no visible effect on markets.
H1N1 was a more serious global influenza that occurred in 2009, but again there was no serious, consistent negative effect on the markets. However, 2009 was a unique time: Obama had just been elected US President, the GFC had just occurred with markets bottoming and beginning to rise in March 2009, right before H1N1 came on the scene, initially in Mexico. The Fed was pouring liquidity into the markets and the government was participating in bailouts. Once the markets bottomed there was a lot of stimulus driving the stock market up. All US indexes rose steadily through 2009.
At present, we still believe that this crisis is most similar to the 1987 stock market crash (see charts, this page) and the 2001-2003 stock market crash. This is a mid-cycle event (see below). That said, it is one of the more serious mid-cycle events to date and it has the potential to spread into something far more serious and reminiscent of the GFC of 2009-09. We do not believe that it will.
There appears to be a trend in some of the global virus data: Nations who have had the most cases are nations that did not practice social distancing and/or nations that allowed unrestricted access through their borders early in the life of the virus.
Once China put quarantines into effect the number of active cases rose, reached a climax, then began to come down. In China, at least, once quarantines of major cities were affected it was approximately one month to declining cases and a little over one month to declining new daily cases. New cases appear to be declining weekly in China at present. Active cases are also declining and have been in decline since February 18. For more see the CS Coronavirus Daily Update.
If these data are indicative of global and US trends once social distancing limitations are set and followed the period of severe limitation from this virus – in the US particularly – may be shorter than currently expected. However, if social distancing is not followed, according to one estimate, there could be 1 million infected in the United States in three weeks from March 16.
It is probably not fair to compare any of the prior incidents to the current Coronavirus. There is no obvious pattern in the markets around events like this. They go down for a period, then the markets return to their previous pattern. In this case, that would be a rising market due to economic optimism. In this case, this was the 2nd fastest decline from a high into a Bear Market (20% correction, or more). The first happened during the Great Depression. We would compare this more to 1987 (chart. left) – though this was caused by an external shock and one could say 1987 was caused by internal shocks and overcompensation of trading programs. In 1987 markets were back to previous highs in 15 months.
In general, the best we can say is that any crisis of this type has usually passed within 4-6 months market time – if not before. In fact, historically, after crises of this type stock markets are usually up 20% or more 6 months to a year later. Current levels on and just before 3/3/20, or with the DOW at around 26, 250 or the S&P 500 at around 3030 are good levels to begin buying back into the markets, but expect further volatility for the next several months. As of 3/14/20 both JP Morgan and Goldman Sachs have forecast recession by July 2020. According to Goldman Sachs the S&P 500 may test support levels around 2100 before the markets have completely bottomed.
As of Monday, 3/16/20, the Stock indexes were down again by 9% or more after being up by that much on the previous Friday. Expect This type of volatility to continue for the immediate future.
CS believes that for those who haven’t been buying into this market that as of the above date we are now at, or close to, the height of the Coronavirus panic. It is impossible to pick the bottom of a correction. If you haven’t bought yet, now is a good time to gradually cost-average back in and pick up high quality stocks at a good value. We believe that markets will be at least 20% higher a year from now. That said, expect further volatility and be prepared for short-term losses – further opportunities to ‘buy-in.’
What Happened Monday, March 09, 2020 In The Stock Markets?
Both the DOW and the S&P 500 were off – down – approximately 7% on Monday, March 09, 2020. Did Coronavirus fears continue to drive the stock markets down on this Monday? Partially.
The primary reason the markets were down on this Monday has to do with the declining price of oil. This has to do with an economic struggle around oil between two nations: Saudi Arabia and Russia. The struggle and the resulting effect on oil relative to a sharp downward decline in price has the potential to benefit another nation – China – and seriously hurt two other nations – Venezuela and Iran.
The Saudis, the Russians, and the Iranians and Venezuelans – where Maduro is still dictator over a nation spiraling into hyperinflation already – depend on the price and sale of oil to support their economies. The higher the price of oil, generally $60 per barrel or higher is an economic benefit (around $40 per barrel may be a floor for Russia, $60 per barrel for fracking companies in the US, and as much as $70-80 per barrel for Saudi Arabia). Anything lower becomes harder and harder on the economy. As of Monday, the price of oil had declined to around $35 per barrel. None of the above three economies can survive on that price for oil for very long. Venezuela is likely to go completely under first, Iran second, and Russia and the Saudis next. These concerns should cause someone to blink in this game of ‘crude chicken.’
China will benefit in the long run because they stockpile oil. They can depend on existing stockpiles in the short term, buy low and build stockpiles for the future recovery. Usually a lower price of oil would translate to gasoline prices and boost the economy and the stock markets. President Trump has supported fracking over the last three years and made the US energy and oil independent, so the United States is only affected in one way: the fear that a too low oil price will cause bankruptcies and business failures of small to medium size oil companies and have a negative effect on the US economy. This drove the markets down on this Monday.
Bottom line: Coronavirus is still an issue for the markets and will likely create volatility and uncertainty for at least two more months. Once the price of oil begins to again rise, fears of the effects on the US economy will also begin to ease.
What Has Happened To The Stock Markets Since?
This is now the fastest sell-off in history and we are in confirmed Bear Market Territory (generally considered a correction of over 20% from highs). As of 3/14/20, Year to date the DOW is down 14%, the S&P 500 is down 16%, the NASDAQ 12%, and the Russell 2000 is down 27%. For the present, the Bull Market is over. (But, is it really? That remains to be seen).
It appears that the stock markets will open significantly down again on Thursday, March 12, 2020. President Trump’s goal at calming fears in his March 11, 2020 evening address from the Oval Office appears to be having the opposite effect. Why?
One reason is due to the fear that suspending flights from Europe for one month will have on both the US and European economies. Trump most of known the possibility of this reaction so his flight suspension has to be seen as a courageous move – one designed to protect America at any cost.
Another possibility is that the Administration’s attention to the Coronavirus and its moves to counteract what is happening in the stock markets may be seen as a confirmation of the seriousness of the crisis. At least, short term. Another reason that markets are being driven down at this point is that panic and fear have now created serious structural concerns. With the markets down over 20% – bear market levels – there is now fear of a sustained recession. In addition, lowered stock market levels have created cash flow and credit problems. The declining oil price – which would usually be good for the economy because it means lower gasoline prices – has created concerns that many smaller energy and oil companies will go bankrupt and be driven out of business. Of course, this is exactly what Russia wants and part of the reason for the oil war between Russia and Saudi Arabia.
Additionally, the markets appear to want more stimulus to put brakes on the panic-induced slide.
Dr. Anthony Fauci, NIAID Director, infectious disease expert, told Congress on March 11, 2020 that infections in the US could approach ‘millions’ if we don’t implement restrictions on people to curb infections. If we do implement restrictions, the US could significantly curb the spread of infections. Later in the evening, President Trump instituted a ban on all airline flights from Europe.
All of these concerns have led to more fear and panic and are driving the stock markets down further. With airline suspensions, the NBA suspending its season, changes in both the NCAA Basketball tournament, and the Major League Baseball schedule there is now real and sustained negative economic impact. This appears to now be a real ‘blood in the streets’ moment.
Interestingly, gold is down on March 12, 2020, under $1650 per ounce. Investors are selling gold near its recent top to cover margin calls in stock market accounts.
On the afternoon of Friday March 13, President Trump spoke again to the nation and announced several measures. In response markets rose about 9% across most indexes and closed at those levels. On the evening of Friday March 13, 2020 Congress passed an aids package that will inject QE into the markets. This should help support the market at the current levels – for the time being. However, expect more ups and downs and volatility for the next 2 months, minimum.
Coronavirus And The Stock Markets: Conclusion
At any rate, we do not believe that this virus will sweep the globe and become the next 1918 Spanish influenza. We continue to predict that Covid-19 will not be as severe as the H1N1 virus of 2009. If true, the panic here certainly seems overblown and the markets much oversold. That said, because of panic and fear there are now real structural concerns relative to the global economy.
Though Covid-19 is a Coronavirus with more similarities to SARS and MERS, its spread thus far appears to have more similarities to H1N1 though the death forecast globally is not currently as high even though the current mortality rate exceeds that of H1N1. The repressed spread and infections in the US thus far may be due to President Trump’s early travel ban on China.
During the Spanish Flu in 1918, infected rates in Philadelphia vs St Louis (chart right) were different because Philadelphia authorities allowed a city wide parade for returning WWI soldiers. The goal of social distancing is to ‘blunt the curve.’
The extent to which the investor is comfortable investing – buying into this still falling market – will be a function of their risk profile, age, financial goals, and total net worth. We have been buying all the way down, but our investment horizon is three to five years. It is difficult, if not impossible to call a market bottom. In addition, in markets of this type there is likely to be a V-shaped recovery, as predicted by Cathie Woods, ARK Invest, in the panel above. It is scary to buy a ‘falling knife.’ But it is equally impossible to grab on to a ‘launching rocket.’
We have underestimated the panic and fear the Coronavirus would cause and the resulting effect on the markets. Regardless, the fear is greater than the reality at this point in time. Until this passes H1N1 levels, that fact remains.
Since social distancing is the primary defense we have against the virus at present, with the President’s travel ban from Europe instituted Friday night March 13th, we feel that the US still has a very good chance to keep total infected and death numbers below those of H1N1 in 2009-2010. The stock market was up overall in 2009 – 23% on average. We currently expect the climax of panic and fear in the US to subside within about 2-3 months.
According to Chief Global Strategist David Kelly of JP Morgan on the morning of March 12, 2020, this is no time to get out of the markets. We will probably see some brief period of recession, but be a long term investor. As for CS, we would rather be a buyer than a seller at this point in time. However, volatility will remain for at least the next month and perhaps longer. Caveat Emptor. Best to cost-average into quality names, as we have previously advised.
For More On John Paul Jackson See This Link, Also, See The Spiritual Life Page