APRIL 28, 2020
Gaining Confidence for the Latter Part of the Year
When I last wrote to you on March 23—which has turned out to be the trough of the market so far—the Dow was at about 18,500, down a breathtaking 37% from its all-time high just five weeks prior. On April 23, the Dow closed at about 23,500, up more than 25% from its March low. Yes, it seems that if you blink these days, chances are that you’re missing something of importance. Have we seen the worst for the markets? In the current environment, anything can happen—but we do think that the latest low will stand. Last week, on our client call, we revisited that discussion, sharing our thoughts on the market, the economy and the recent activity in the oil market.
Pain in the Oil Patch.
Oil prices actually fell into negative territory—and not just by a little. On one bleak day, prices bottomed at -$37/barrel, meaning that (theoretically at least) if you wanted to buy 1,000 barrels, the seller would pay you $37,000 to take the oil off their hands. That anomaly proved very transitory, and oil prices are back in the black—but they’re still under pressure. Bond yields also experienced unusual volatility, though they too appear to have calmed down. And maybe most important, the government passed two enormous relief bills totaling $2.8 trillion.
The Markets: Are We There Yet?
The short answer to the question above is “No.” But a month ago we were looking for a bottoming process, and it appears to be happening as we speak. The Dow’s March 23 low (ditto for the broader S&P 500) is being re-tested, so far successfully. If that holds—despite plenty of volatility along the way—we think the market rebound will continue and strengthen in the second half of the year.
That said, we’d like to see value (bargain-priced) stocks and small-cap stocks participate along with their large-cap growth counterparts. Value stocks have plunged about five times as much as growth so far this year, which isn’t surprising for companies that investors weren’t sure about even before the market plunge. Historically, value and small-cap rebounds from market troughs have been stellar—to the tune of 30% and 40% over short time periods. Will this pattern continue? Once value and small-cap start responding, we’ll have solid confidence in a market recovery.
“U”-Shape More Likely
As for the broader economy, our investment team does see a recovery coming. But because of the extreme damage done to so many sectors and the natural fear among consumers to spend money again in close quarters like a shopping mall or a restaurant, we don’t expect the much-hoped-for “V”-shape recovery: down fast, up fast. Rather, we think we’ll see a slower, phased-in “U” shape. However, the near-term numbers will be ugly. We expect very slow, if not negative, GDP growth for the first quarter of the year, and the current second quarter will be worse. We are more confident than we were last month though, that a recovery will begin, albeit slowly. Won’t Energy Prices Drag on the Economy? Yes they will. The virus has decimated oil consumption, cutting 20 million barrels a day off the 100 million we saw prior to the pandemic. While gasoline prices have plummeted, don’t expect to see Americans in their cars as we were before the pandemic for a while.
While our investment team expects oil prices to remain under pressure, the energy sector is relatively small (though it looms large in the minds of many Americans). The best companies will find creative ways to endure and even succeed in the current hostile environment. That’s what good companies do.
Duress Creates Investment Opportunities Security prices are cheapest when they’re depressed. We’d point specifically to the biotech industry (for obvious reasons) and to tech and tech-related stocks like the FAANGs (Facebook, Apple, Amazon, Netflix, and Google—which trades as its parent company Alphabet). The tech companies have enabled us to conduct business, do our household tasks, and stay in touch with friends and family in an increasingly virtual world. Yields on corporates initially spiked up on investor fears but have begun to come down (meaning their prices have increased) as the Fed and the fiscal stimulus calmed the waters.
Unprecedented Times Call for Patience and Perspective
In closing, I’d remind you of the old saying that “This time it’s different” are the most misleading four words about the markets and the economy—except that this time we think it really is different. Some of our regular daily activities, at work and at home, will probably remain virtual even after the coronavirus is history. And many companies, large and small, will begin operating under new business models with new rules about working with customers, suppliers, and employees.
That’s not a bad thing. It’s always scary when the world changes on us. But the ability to adapt to change has always been the hallmark of success for a company—and for an individual too.
We at People’s United have helped our clients through many changes: We’ve been around for generations, offering wealth and investment management services for more than 80 years. So we’ve seen a lot, and we’ve built up uncommon expertise in a wide variety of financial issues. I encourage you to reach out to our advisors with any questions that you have in this difficult time, and I thank you for the trust you’ve placed in us.