Market Update Q1 2020

COVID-19 and the Road Ahead

The end of the first quarter of 2020 will go down as one of the most memorable trading periods in history. While we dissect what occurred during this time, there is still a lot of uncertainty ahead. Both monetary policy and fiscal policy makers took aim at curbing the economic impact of the Novel Coronavirus. The president and government officials had initially expressed optimism that the American people could get back to work quickly in order to soften the monetary and economic impact of the virus. Since writing this, the situation has changed with extended Social Distancing measures. We are continuing to monitor the guidelines and impacts closely. People are getting used to their lifestyle inside quarantine. Its initial shock is dissipating but, many workers are tired of being fearful and are eager to get back to work. So, what should we expect moving forward? We will look back in time to help us better understand how to navigate the future ahead.

Bailouts

The Senate approved a $2.2 trillion stimulus bill on March 25th, intended to respond to the Coronavirus pandemic. It includes direct payments of $1,200 to Americans that earn up to $75,000 (additional $500 per child). The measure will also offer $377 billion in federally guaranteed loans to small businesses and establish a $500 billion government lending program for distressed companies reeling from the impact of the crisis. This will include allowing the Federal Government to take an equity stake in airlines that received aid to compensate taxpayers. It will also send $100 billion to hospitals. A deal of this magnitude has never been done before, but there are previous bailouts we can look at to give us a framework for what we could expect.

Airline bailout (2001)

The terrorist attacks in 9/11 caused airlines to be grounded for several days after the attacks. The industry said the ban cost their companies $340 million per day in lost revenue. The bailout was about $15 billion in total, $5 billion in direct federal aid and $10 billion in loan guarantees for the industry. The biggest airlines received everything they asked for and responded by laying off employees and drastically reducing service. In 2008, the Air Transport Stabilization Board was created to help rescue airlines. It helped keep airlines from going out of business and it could have been much worse without the aid of Congress.

Emergency Economic Stabilization Act a.k.a TARP (Troubled Asset Relief Program 2008)

The housing crisis morphed into the worst economic collapse since the Great Depression. Assets held by banks and hedge funds became worthless. Lehman Brothers went bankrupt, inflicting billions of losses and threatened the entire financial system. Congress created a $700 billion program to authorize the U.S. Treasury to purchase “troubled assets” from institutional investors. TARP rescued failed banks and helped the auto industry (GM & Chrysler), and families facing foreclosure. The program was highly controversial. While it may have curbed the economic fallout of the financial crisis, more work needed to be done. This leads us into the American Recovery and Reinvestment Act.

The American Recovery and Reinvestment Act (2009)

TARP helped mitigate some damages, but the economy continued a downward spiral. Unemployment spiked, GDP plummeted, and household net worth dissolved. The total stimulus of this bill was $831 billion which included temporary tax cuts for families and businesses, an expansion of food and assistance benefits, unemployment benefits. It also included new spending on local infrastructure projects, education programs, and other initiatives. The economy ticked up and the recession ended four months after the measure became law. The recovery was sluggish, unemployment remained high, and people were still suffering residual effects of the collapse well into the mid 2010’s. The history of these bailouts reveals that they are a necessary component of recovery. They may take some time to play out and government bailouts often pick favorites as to which companies will receive the biggest benefit.

BEAR DOWN

March 2020 currently holds the record for how quickly prices dropped into a bear market from setting record highs. To put it into perspective, it took almost a full year for the 2000 and 2008 market crashes to retreat 30% from their highs. This time it took 19 days. It may be easy to assume that this crash is indicative of the seriousness surrounding the Coronavirus. While we do think it is important to take this virus seriously, it is merely a small piece of the puzzle regarding this sell-off. We also believe that markets are evolving as their operations and underlying mechanics change the way price equilibrium is found.

Short Selling

The magnitude of this sell-off tells a story that goes deeper than the virus itself. Short selling undoubtedly is a contributor to the carnage. It allows investors to make money as the market continues to spiral out of control. The US financial markets are lax when it comes to short selling. It is said to add to liquidity, but at what cost? As markets continue to fall, short sellers may add more fuel to the fire. Short selling wasn’t always this way. In 2007, the SEC scrapped a rule that put restrictions on short selling. This rule, called the “Uptick Rule”, bars short sellers from betting against stocks when their prices are falling. Today, many prominent investors and executives have asked the Trump Administration to bring back this rule. The US continues to suffer great losses, while other countries that have stricter regulations haven’t experienced the same declines we’ve had.

Algorithms

Another aspect that is relatively new to the market is algorithmic trading. It may even work in tandem to short selling. New technologies have changed the way we invest. The greatest financial minds are having trouble competing with computerized models. Guy De Blonay, a fund manager at Jupiter Asset Management, said 80% of the stock market was controlled by machines during the selloff in 2018’s fourth quarter. J.P. Morgan analysts said “fundamental discretionary traders” accounted for only 10% of stock trading volume. When large institutions buy or sell large positions, computer algorithms find price anomalies and trade on the other side of it. This is one reason a large majority of intraday records were broken this month. The market may be down 30%-plus, but machines are feasting on the intraday moves as they “buy the dip” and quickly sell (or buy) in the final hours.

The news is riddled with stories that sell you panic. We encourage you to stay informed but not fixate on it. We are not panicking, and we look forward to an opportunity to provide an edge in the market ahead. Renew Family Wealth is currently developing a defensive equity-based portfolio for our clients. We think investors should tread carefully in the road ahead. This selloff has given us all an opportunity to enter the market at attractive valuations. We recently conducted an investment committee meeting to screen businesses we feel comfortable owning moving forward. As businesses continue to suffer, we want to own companies that have strong balances sheets. During our investment committee, we conducted a fundamental analysis of specific organizations that are well capitalized, have historically rewarded shareholder patience, and demonstrate sustainable revenue growth. Our belief is that during these turbulent times, organizations that have these characteristics are the ones whose business continuity is least impacted and therefore positioned to extend beyond the systematic recovery. We will also be conducting a series of complimentary online seminars in the coming weeks to help you navigate these conditions. If you would like us to review your portfolio and its ability to withstand a recession, please email us at info@renewfamily.com.