Market Strategy 4/06/2020
We’ve Only Just Begun
Workin’ at “the mill” and the “every-day grind” never looked so good
Key Takeaways
- As investors start a holiday-abridged week (with equity markets to close on Good Friday) they will likely keep focus on developments tied to Covid-19 and the impact of the economic shutdowns.
- Last week’s employment report, which showed a decline of 701,000 jobs, was likely only part of the job losses that are expected to follow.
- Equity markets last week managed to show some resilience notwithstanding bad news on the Covid-19 front.
- This week’s economic data will provide insight into the Fed’s March FOMC meeting minutes, initial jobless claims and consumer sentiment.
On Sunday with investors and billions of other humans hunkered down across a world that’s seeking to stem the spread of the Covid-19 virus, markets across the globe prepared to open for another week confronted by a situation that broadly defies imagination.
The shuttering of much of the US economy with a vast segment of the US population “sheltered in place” has created an unprecedented economic nightmare for government officials, businesses and households in the US as well as in other countries around the world.
Volatility across asset classes over the quarter just ended and through last Friday rivaled historic precedence empowered by algorithmic trading and panic-like behavior by more than a few investors.
And yet notwithstanding the havoc that Covid-19 has spewed so far across the globe and its destruction of innocent lives and the plans and hopes of others there’s been no shortage of good people who have risen to the occasion yet another time in the history of humanity to minister to the sick, lend a helping hand to a neighbor less fortunate, and to seek methodologies of herculean efficacy to stem the spread of the virus.
Last week saw stocks as illustrated by the S&P 500 bounce between gains and losses as traders and investors attempted to sort out news crossing the tape from moment to moment and day to day that raised hopes one day, dashed them the next on issues tied to: Covid-19, prospects for the domestic and global economy, surging unemployment, falling job numbers, government programs to stem the tide and the start of Q1 earnings season next week when the big banks and other household names report revenues and earnings.
It’s a “fasten seatbelts—serious turbulence ahead” environment for now. At the home level “shelter in place” living is causing not just a few folks to long (if not for the daily commute), for the camaraderie and interaction of the work place.
Three weeks into the US experience with “shelter in place” mode and with the likelihood (based on what officials are saying in their daily missives) of more than a month or two more of the current regime “cabin fever” is surfacing in more than a few households.
Based on the experiences of China, South Korea, and Taiwan, which have managed to experience positive outcomes in their battles with Covid-19, we can expect things are likely to get worse for now on the virus front rather than better as the insidious Covid-19 runs its course before it flattens and fades out as viruses have been known to do.
For now the impact on the US economy being broadly placed on “pause” will be determined to large extent by how long it takes to stem the virus’s spread.
Until the virus shows a decline in its trajectory and rolls over, a semblance of normalcy will likely remain out of reach. The ultimate extent of the damage to the economy and the corporate sector will be hard to determine in the near term and will likely vary greatly within segments of the economy and sectors of the markets.
For now the markets will likely remain hostage to news on how long it will take to “get back to business” and “the good life.” We’d expect markets to continue trading on a combination of fear, technical factors and wistful hope with fundamentals clouded by the uncertainty weaved by the insidious virus.
That said many advancements in technology, pharmacology, biotechnology, and medical equipment exist and are growing in sophistication and efficacy empowered by technology giving us expectations that the risk will be mitigated likely sooner than skeptics expect but not as quickly as we’d like to see.
Diversification, patience and right-sized expectations remain in our view the most practical discipline for investors to deploy. We suggest building shopping lists of stocks with an eye for “babies that get thrown out with the bathwater” in turbulent market interludes.
While we continue to favor cyclical sectors over defensive sectors we have recently become selective in the latter space as some “babies” within that space have been tossed out with the bathwater. Our overall focus persists with cyclical sectors including technology, consumer discretionary, and industrials looking particularly attractive for when the tide turns against Covid-19 and the world of opportunity we have come to know becomes more evident.
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