Quarterly Market Update 3.31.2020

The numbers are in for one of the worst quarters in the history of the U.S. stock market.  The U.S. market was down -20.57% for the first quarter of 2020.

In unprecedented fashion, the U.S. economy has been shut down to control the coronavirus, creating extraordinary volatility in the U.S. stock market.  On several occasions market limits were instituted and circuit breakers set off by the huge drops.  There were also a few record-breaking positive days.

It appears the market found a bottom two weeks ago.  But the volatility will continue as the market will test that bottom several times before it stabilizes and moves upward. 

The market will recover, and most experts predict the recovery will be “V shaped”.  Meaning the recovery will match the drop.  Just as the drop was quick and sudden, so will the recovery. 

There are lots of comparisons being made, but I find most are not applicable.  This situation is truly unprecedented.  Yes, the economy has come to a halt (recession), but it is not because an industry or part of the economy failed.  The economy has been forced to a halt.  As soon as the forced closures are lifted the economy will be back on its feet and all the positive metrics will return.  The main condition affecting the recovery will be the speed at which businesses are allowed to re-open.

Health experts are expecting the numbers regarding the coronavirus to improve mid-April.  The data is already showing the curve improving in many countries around the world and parts of the U.S.  I can’t listen to or watch the news.  I do not care for their presentation.  I use two websites for information and data.  Health officials also use these resources, because the data is accurate and unbiased:

https://coronavirus.jhu.edu/data/new-cases

https://covid19.healthdata.org/projections

I believe that one comparison is valid.  That is the comparison of the damage expected to be done by the coronavirus versus other health issues.  The coronavirus is killing people and we need to protect our population from pandemics.  But it is also important to have context in order to conduct a proper evaluation. 

In the world of investments, using benchmarks is crucial.  All my due diligence is done comparing all aspects of investments to appropriate benchmarks.  That is the basis of prudent analysis.  Something the media ceased doing years ago.  The days of Jimmy Olson running around after the facts are long gone.

To get an idea of the exactly how bad the coronavirus is, it is important to compare it to other diseases and health issues that plague the U.S.  These are links to CDC website. 

https://www.cdc.gov/flu/about/burden/preliminary-in-season-estimates.htm

https://www.cdc.gov/nchs/fastats/leading-causes-of-death.htm

It is important to understand the difference between the economy and the stock market.  The economy looks back.  The economic data for a quarter is not calculated until after the end of the quarter.  The stock market is forward looking.  The performance of the market today is based on how the market sees the future.

All the metrics used to measure the economy are going to be terrible over the next few months.  Unemployment is going to skyrocket, economic growth is going to grind to a halt, consumer spending is going to drop, and of course corporate profits/earnings are going to crash.  But this is all temporary and occurred because businesses were forced to close, mostly by government order.  Although the numbers are going to be terrible, the market has already accounted for them.

It is true that many small businesses will not make it through the lockdown.  And many, many people are suffering economically.  But as soon as businesses are allowed to re-open people can get back to work.  And consumer demand will return with fervor.  While some businesses will not survive, new businesses will replace them because the demand is not gone.  The physical businesses (stores and restaurants) are still there, they just need new owners to take over.

The government has stepped in with a huge stimulus spending bill. The stimulus will provide direct cash payments to individuals and access to loans with very favorable terms for small businesses.  So, help is on the way for individuals and small businesses who are suffering financially.  We will have to address the $3T cost that is being added to our every growing debt later.

One important cause for the current market crash is the Oil industry.  At the same time the coronavirus began to hit the U.S., Russia and Saudi Arabi got into a major disagreement over oil production.  They were working on an agreement, but at the last minute the deal blew up.  In response, Saudi Arabi dropped the price of oil and refused to decrease production – in a global marketplace were demand is dropping.  This has caused the price of oil to plummet.  While this is good for us at the pump, it is not good for the economy or stock market.  When oil prices drop, oil becomes too expensive to produce.  Many oil production companies reduce or shut down operations which causes unemployment.  This also causes oil/energy company stocks to drop in price.

Investors must remain patient and steadfast.  The drop in the market was sudden and totally unexpected.  All our accounts have dropped in value.  The fastest way to get your account back is to keep it invested.  If you have been watching, there have been record setting positive days.  If you miss even one of these big recovery days, your account performance will be negatively affected.