iQUANT.pro Monthly Market Commentary

For the month ending March 31, 2020.

A Different Kind of March Madness

All major asset classes had a horrific month in March and are down year-to-date.

For the month, the S&P 500 was down 12.5%, the worst performance since the 16.9% drop in October 2008. Between February 19 and March 23, the S&P 500 dropped 33.9%. It proceeded to bounce back 17.5% in the following three days and then yo-yoed up and down through to the end of the month.

March witnessed unprecedented volatility. Out of 22 trading days, the S&P 500 moved more than 2% on 17 of them, with seven positive days and ten negative. The biggest one-day drop was 12%, the third-worst after Black Monday in 1987 and the first day of the market crash in 1929.

On the fixed income front, the Fed moved aggressively, cutting interest rates to zero and injecting more than $1 trillion into the system to stabilize markets. It purchased securities across a range of maturities and expanded lending facilities, stepping in at a speed and breadth never seen before, even in the entirety of the 2008 financial crisis.

Oil prices had their worst month and quarter ever, with Brent prices down 54% for the month and 66% year-to-date. Prices were dragged down by the demand shock of the coronavirus and an ill-timed price war between Saudi Arabia and Russia. Demand is down over 25% year over year and the Saudis instigated a price war after failing to reach an agreement with Russia over production cuts in early March.

Gold has failed to offer a safe haven for investors, ending the month flat after dropping 7% mid-month.

The drops (and recoveries) have left investors reeling and wondering: What comes next? Have we hit the bottom? When will the economy recover? Will we get back to where we before? Let’s try to address these questions.

What comes next?

The short answer is: nobody knows. The Coronavirus pandemic is unprecedented. The closest analog is the 1918 Influenza epidemic but the world has changed a great deal and is much more interconnected now than it was then. Economies are more intertwined and healthcare is more advanced.

The speed with which the pandemic has spread, as well as the global response to it, has been breathtaking. The economy has never shut down like this before and it’s not an engine that you can turn off and on. There are thousands of interconnected parts that act in concert like a finely tuned orchestra. We’ve told the string, woodwinds and brass sections to stay home while the percussionists gamely play on. The rest of the band may have lost their sheet music by the time they can safely gather together to play again.

We won’t have any real idea of what the future will look like until we’re past the peak infection point. At that point, we should be able to start assessing how bad the damage is. And that will allow us to figure out what additional stimulus is needed to get individuals and the economy back on their feet.

The positive is that once we hit the peak, the future will be brighter. A substantial chunk of the population will have had milder cases and will be armed with the antibodies necessary to fight off the virus. This will enable them to fully rejoin society and begin to get things working again in a more robust fashion.

Have we hit bottom?

We won’t know whether we’ve hit bottom until it’s in our rearview mirror. Investors have been well-trained to buy the dips but given the uncertainty of the situation, we could very well see the market test new lows in the near future. And although valuations have come down, the earnings outlook is likely to be cloudy for the next few months, so, it’s difficult to say whether anything is “cheap.” It is possible that the current environment presents a historic buying opportunity and given the extraordinary volatility we’re seeing, you might want to consider establishing small positions in solid companies that have pulled back. That being said, there will likely be opportunities to establish positions in good companies at reasonable prices in the future. As always, buyer beware.

When will the economy recover?

As Dr. Anthony Fauci said: “you don’t make the timeline. The virus makes the timeline.” At this point, GDP forecasts have been revised down to an average decline of 1.6% for the year – but this is a moving target. Until we can determine how severe the economic damage is, and how best to fix it, we won’t know how long it will take for the economy to recover.

Many are forecasting a quick V-shaped recovery in Q3 or Q4 and although this could happen, it is probably overoptimistic at this point. The longer this takes to play out, the greater the economic damage and the greater the difficulty in recovering.

Will we get back to where we before?

Once again, it’s hard to say at this point but we’ve got our work cut out for us: 6.6. million new unemployment claims were filed last week. This is on top of the 3.3. million claims that were filed the previous week. This translates into approximately 10% current unemployment and it will go higher.

The St. Louis Fed has estimated that 47 million jobs could be lost, which would mean unemployment could exceed 30%. Such staggering levels of economic dislocation will reverberate throughout the economy and unless government stimulus programs are able to address and ameliorate this dislocation quickly and effectively, it’s difficult to see how we regain the ground we’ve lost.

The Silver Lining

As distressing and destabilizing as the pandemic has been, the positive is that this could be a relatively short-lived event. With some luck, self-isolation strategies will begin to work and we will reach a peak in cases in the next few weeks. Assuming the government passes additional stimulus measures that put money in the hands of consumers and preserve jobs and businesses long enough to get them functioning again, we could bounce back from this relatively quickly.