April Monthly Newsletter – Historic Weeks in the Markets: COVID-19-Induced Selloff

As the coronavirus (“COVID-19”) continues to spread on a worldwide basis, markets have been wrestling with how to interpret the potential economic impacts and the inevitable chain reaction now in motion. Amid this uncertainty, recent days have not only seen extreme market volatility but also a wave of medical, economic, and politically based news events, any of which under normal market circumstances would dominate headlines. However, in this new COVID-19-driven environment, they are forced to compete for investor attention. Here we take a summary look at what has contributed to these historic weeks in the markets and current conditions that show few signs of calming anytime soon.

Market volatility will likely continue.

As 1,000 point moves in the Dow now become increasingly common, investors should brace for more wide fluctuations on a daily basis as COVID-19 news remains fluid in regard to infection and fatality rates, as well as geographic expansion. Unfortunately, these numbers continue to increase at a rising pace globally and much of the current downside volatility in stock prices is being driven by ongoing attempts to estimate the effects of the virus on the U.S. and global economies, as well as profitability to individual companies.

There will undoubtedly be negative economic consequences of the virus though quantifying the magnitude remains a moving target.

In the U.S., where the virus most likely did not begin materially impacting consumer and corporate behavior until probably about early-to-mid February, most estimates for 1Q 2020 gross domestic product are being taken down by an incremental 0.5%–1.0% putting a final number somewhere in the 1.25%–1.75% range off of initial forecasts of above 2%. We caution that these projections could change quickly and with a downward bias. The travel and leisure sectors are, of course, being hit the hardest. Declining oil prices will impact the energy sectors and, from a broader perspective, consumers are likely to become more conservative in their spending, at least in the immediate future.

Long term interest rates have experienced a historic decline over the past few weeks.

The 10-year U.S. Treasury yield cratered below its previous record low of 1.37% and all the way down to a March 9 opening rate of about .50%. This drop is nothing short of historically remarkable by any account. The 10-year yield reflects not only a global flight to safety as the coronavirus expands, but also the fact that even in at its newly re-priced level, it still remains positive, which is a favorable profile when compared to negative rates, such as -.19% in Japan and -.72% in Germany. While the precipitous decline in long-term yields is unfortunately being viewed as a negative catalyst for stocks, we believe there is a potential silver lining in that these materially lower rates can help consumers refinance long-term debt, such as mortgages, and can also provide meaningful support for equity valuations.

As the equity markets continue to fall, we believe it is vital investors not become overly focused on calling a bottom in the market, as such speculation can often prove futile and frustrating.

Following selloffs of this nature, perhaps the closest comparison last seen in the fourth quarter of 2018, we feel it is more important for investors to determine long-term entry points based on longer-term criteria. As expectations of economic and corporate earnings growth over the next two quarters or so have now transitioned from positive to questionable, it could be productive for stock investors to focus on what appears to be historically anomalous relationships between stock dividend yields and long-term interest rates, which are now at historically high spreads. We are believers that the two strongest potential catalysts for stocks following their recent declines is the possibility that containment of the virus can be achieved and that the recent historic interest rate declines will eventually prove additive to stock valuations.

In summary, the markets have clearly entered at least an interim period of heightened volatility and intensified investor angst. These conditions are being exacerbated by the fact that the overwhelming determinant of the downside volatility, COVID-19 and its infection rates, are medical in nature and beyond the scope of most market and financial experts or pundits to fully, or even come close to fully, understanding. Given this reality, we believe investors should focus on known metrics within the equity and credit markets and recognize there are no foregone conclusions or outcomes to the current crises. Time-tested valuation criteria and relationships between stocks and interest rates still have merit in our opinion, even amid medically driven selloffs such as this one.



The Coronavirus Contraction


Due to fears about the Coronavirus – more specifically, the forceful government measures designed to halt its spread, the US is on the front edge of the sharpest decline in economic activity since the Great Depression.

The US economy was on track to grow at around a 3.0% annual rate in the first quarter before fears and response measures escalated. Don’t just take our word for it, the GDP model used by the Federal Reserve Bank of Atlanta is still projecting real GDP growth at a 3.1% annual rate in the first quarter. That model generates a forecast based on the reported data available through March 18th, which reflects all the key economic reports for January as well as some of the key reports on activity for February.

But we all know the reports for March are going to be horrible. Initial unemployment claims recently increased 70,000 to 281,000. We’re projecting an increase to 1,500,000 for last week. To put this in perspective, the peak for any week during the Great Recession of 2008-09 was 665,000. The record high was 695,000 in October 1982. In other words, it’s getting ugly out there.

The hard data for March will show severe declines in business activity across many sectors: hotels, restaurants, airlines, autos, you name it. Small businesses are getting killed – murdered really – as government smothers them with restrictions stiffer than anything seen during the notorious Spanish Flu of 1918, the Asian Flu of 1957-58, or the Hong Kong Flu of 1968-69.

Our best guess – and, at this point, given the unprecedented nature of the situation, anyone who calls it anything other than a “guess” should be taken with a grain of salt – is that the US economy will contract at about a 35-40% annual rate in both March and April, stabilize in May, and then start growing again, gradually, in June. Translating this into quarterly changes, we’re projecting a 1.5% annualized decline in Q1, a massive 20% annualized drop in Q2, but with the economy growing at a 3.0% annual rate in Q3 and a 3.5% rate in Q4 and beyond.

To put this in perspective, the fastest drop in real GDP in any quarter in the past 73 years (so, since 1947) was the first quarter of 1958, when the US was hit by the Asian flu and fell at a 10% annualized rate. It’s important to remember that certain parts of GDP will not feel a pinch, like the rental value of homes, health care, government purchases, or groceries. We’re guessing business investment in intellectual property will hold up well, too.

We don’t have to fully eradicate the Coronavirus to start growing again. The largest downward pressure on the economy is likely to be felt when the number of new cases is peaking. Once new cases have peaked, we’re likely to see a combination of either an easing of government restrictions or, informally, fewer businesses and customers complying with those restrictions. Implicitly, we’re projecting the growth in new cases will peak by mid-April, which is why we’re forecasting that economic activity levels off in May and grows beyond.

In the meantime, economy-wide corporate profits are likely to temporarily plummet, dropping by 60-80% in the second quarter. Policymakers have a number of imperatives that need to be addressed ASAP, including preventing job losses, helping those who lose jobs and customers due to the government’s restrictions, and expanding tests and quarantines for the ill so restrictions can be loosened on the rest of us. We are not typically big supporters of expansive unemployment benefits, but the situation is much different when the government is forcing businesses to shut down.

Time is of the essence. Free-market capitalism, the American way of economic life, is not consistent with mass government-imposed shutdowns of business activity. Those shutdowns, if they last too long, will erode future living standards and may end up killing more people than the Coronavirus itself. The faster we can end the shutdown, consistent with general health and welfare, the better. Therapeutics and, eventually, a vaccine are needed, and will help stem an economic downturn that could lead to a permanent (and ultimately harmful) expansion of the federal government.

The days ahead are going to be tough, no doubt about it. But in the end, the spirit of America will prevail. It always does.


Tax Day now July 15

Treasury, IRS extend filing deadline and federal tax payments regardless of amount owed.

WASHINGTON — The Treasury Department and Internal Revenue Service announced today that the federal income tax filing due date is automatically extended from April 15, 2020, to July 15, 2020.

Taxpayers can also defer federal income tax payments due on April 15, 2020, to July 15, 2020, without penalties and interest, regardless of the amount owed. This deferment applies to all taxpayers, including individuals, trusts and estates, corporations and other non-corporate tax filers as well as those who pay self-employment tax.

Taxpayers do not need to file any additional forms or call the IRS to qualify for this automatic federal tax filing and payment relief. Individual taxpayers who need additional time to file beyond the July 15 deadline, can request a filing extension by filing Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. Businesses who need additional time must file Form 7004.

The IRS urges taxpayers who are due a refund to file as soon as possible. Most tax refunds are still being issued within 21 days.




Did You Know?


China’s new cases plummet: China has now closed down its last temporary hospital built to handle COVID-19. Not enough new cases to warrant them (Jane Dalton, Independent, March 14, 2020).

103-year-old recovery: A 103-year-old Chinese woman has made a full recovery from COVID-19 after being treated for 6 days in Wuhan, China, becoming the oldest patient to beat the disease (Chiara Giordano, Independent, March 11, 2020).

Stores re-opening: Tech Giant has reopened all 42 of its retail stores in China (Sam Byford, The Verge, March 13, 2020).

South Korea’s dramatic drop in new cases: After its peak of 909 newly reported COVID-19 cases on February 29th, South Korea has now seen a dramatic drop in the number of new cases reported daily (Dennis Normal, AAAS, March 17, 2020).

Israeli vaccine development: More than 50 scientists in Israel are now working to develop a vaccine and antibody for COVID-19, having reported significant breakthroughs in understanding the biological mechanism and characteristics of the novel coronavirus (HospiMedica, March 16, 2020).

Yet another vaccine in the works: A San Diego biotech company is developing a COVID-19 vaccine in collaboration with Duke University and National University of Singapore (Globe Newswire, March 4, 2020).





“Hope is being able to see that there is light despite all of the darkness” – Desmond Tutu

“Positive thinking will let you do everything better than negative thinking will” – Zig Ziglar



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