Written by: Pictured Rocks Investment Advisors
Quarter-end has now ended where there was an estimated $200B of equities to buy leading up to last Tuesday's (March 31st) trade due to rebalancing by global pension funds. The S&P500 had rebounded over 10% during that last week in March and, while market direction can always be caused by a multitude of factors, we believe that rebound was mostly driven by front-running of the pension fund trade. From here, we're likely going lower in the markets.
The image above is a perfect metaphor for the current state of the markets. The walrus represents a stagnant global economy that is being overfed liquidity and stimulus by global central banks and governments due to the indefinite global COVID-19 lockdowns. The polar bear represents a encroaching bear market that has attacked people with fast, furious, and relentless power, and will only continue to do so with COVID-19 lockdowns fueling its hunger. While the liquidity and stimulus programs by central banks and governments to help stabilize the markets was a reason for the rebound in the S&P500 at the end of March, it doesn't help solve the indefinite COVID-19 lockdown problem for which we are still facing.
Last week, figures for March unemployment showed a loss of over 700K jobs with the unemployment rate spiking to 4.4% from 3.5%. This is just the beginning. Experts are calling for the unemployment rate to spike to over 10% by the summer. Almost every public company has pulled its full-year earnings guidance. We still have a long way to go to get through the enormous amount of headline risk that the markets will face over the next few quarters, and our central bank's liquidity muscle and government's fiscal bazookas are, for the most part, out of big ammunition. They are left to bringing knives to a gun fight, a fight that has been ironically unleashed by the public policy response to this virus.
Many market pundits are saying once we see a deceleration (second derivative) in COVID-19 cases / deaths in the U.S., the markets will be off to the races. This will likely occur in the coming weeks. We disagree with that stance, at least from a longer-term perspective. This crisis shouldn't be compared to the 2008 global financial crisis or even the 2000 dotcom collapse where markets rallied well in advance of the economic rebound. Until we have a vaccine for COVID-19, our economy will be stuck in a new normal as health officials and governments will continue to shape public policy for a potential COVID-19 relapse. China is seeing that now. Their stock market rallied when the government lifted the lockdowns and praised a substantial decrease in cases / deaths. But now, China is back to shutting down parts of the economy for fear that new COVID-19 outbreaks could come roaring back. The Shanghai Composite has tanked, again.
We have previously argued the need for a more targeted and tactful public policy response to this disease that doesn't 'trade a crisis for a crisis', because that's exactly what we are doing. Recall, over 500,000 cancer deaths were directly related to the 2008 global financial crisis as so many unemployed people didn't have access to health care and couldn't afford to see a doctor. This doesn't account for suicides and the emotional suffering and starvation of millions during the financial crisis. Currently, COVID-19 has caused over 70K deaths globally. We are not trying to be insensitive around the seriousness of COVID-19, but we invest in the market with the understanding that there's always a smarter way to do things, and our public policy for this disease should consider that as well.
Let's put it this way:
Would it have been good public policy for governments to force everyone and every business to spend their way out of the deadly 2008 global financial crisis, even when many people and businesses couldn't afford it?
This is essentially the same tactic we are using to confront the deadly COVID-19 crisis with forced lockdowns of everyone and every business, even when many people and businesses can't afford it. Again, health officials are all on the same page now that this virus is not dangerous to 99% of us, or even more once we have testing available for everyone. They have also said that up to 70% of us will likely get the virus over the next year even with these drastic social distancing measures. Yet, they then suggest a draconian 18 months of social distancing or lockdowns are likely, which will be catastrophic for the economy and people. Again, these are theoretical predictions and recommendations by doctors that are made in a vacuum and without concern for anything else. That's not proper science and pragmatism that should be used for public policies, in our opinion.
The uncertainty and mortality while in a financial crisis or a medical crisis will always be frightening. U.S. public policy inconsistency has been evident, however, in the handling of COVID-19, which has been largely shaped by the U.S. media reporting of every COVID-19 death and case (recall, the flu has killed up to 63K in the U.S. this year, but we don't hear those sad individual stories in the media). It is obviously much easier to fear a medical crisis than a financial crisis, but the data doesn't support the trade-off to favor one over the other in terms of deaths and the stress on the system/people. This is precisely the reason why we shouldn't trade a crisis for another crisis in this instance.
It is also important to note that doctors (i.e. the medical officials shaping our current public policy) have the mandate to save ALL lives. These are good people, without a doubt, but unfortunately their personal mandate can't and shouldn't drive public policy, since the "health" of people is multi-faceted from a public policy standpoint. We need other scientists to have a seat at the table when shaping public policy, and that includes economists and sociologists and psychologists that would certainly disagree with these drastic lockdowns in place in terms of the collateral damage being caused. More balanced and targeted tactics to protect those most at-risk is the ultimate solution - not lockdowns of the entire population. Otherwise, we will continue to bury too many people and businesses to a point of no return.
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