Week In Brief: May 26th

June 2, 2020

Like Saturday's successful SpaceX launch, the rebound in U.S. stocks since they hit the March 23 low has been stellar. The S&P 500 index's best two-month's since 2009.
Optimism over the nation's gradual reopening and progress towards the development of a coronavirus vaccine has lifted the S&P 500 36 percent. Cutting losses for the year to 5.8 percent. Last week, the index rallied another 3 percent. The S&P 500 rose 4.53 percent in May. Which followed an April return of 12.68 percent.
It becomes more difficult by the day to argue that this remains a "Bear-Market Rally." The higher prices go, the more the market confirms this is no drill, but a legitimate move higher.
Investors have embraced signs that economic activity could resume faster than most expect across parts of the U.S. and around the world. Restaurant bookings, hotel spending and airline travel appears to be picking up. Coinciding with a decline in daily new virus infections. This missive has long held that the best means of research usually arrives via the empirical evidence immediately before us. Michigan's Consumer Confidence Index? After a weekend of watching people enjoying out and about, one easily discerns that confidence has elevated month over month. Crowded restaurant patios. Busy boutiques. Walkers. Runners. Images of crowds on Florida beaches. All signs of people ready to resume their normal lives.
The nation is ready to embrace any semblance of normalcy. Until that exercise reveals problems in so doing, we'll watch as different regions and venues slyly push their doors open and let sunlight, fresh air and consumers back in.
Some of which has helped drive optimism over the economic and equity market recovery. The notion that equity markets may pull off a V-shaped snap-back. Such positive thinking has kept the S&P 500 index hovering near the 2940 resistance/support level like flies at a grill out.
2940 represents the level at which the S&P 500 must climb above or fall below in order to pave the way for the next meaningful run. Be that higher or lower. The index has held to that 2940 point -- climbing briefly above and briefly below -- since May 19th.
Recall that we believe three possible scenarios are in play. Let's review:
1. Best case, least probable... unprecedented government stimulus and financial support persuades global investors to overlook the near-term chaos and focus on the future outlook. One that holds that the coordinated global stimulus and bailout efforts will succeed in achieving some semblance of recovery much more quickly than previous economic crises. Leaving global economies intact (slightly wounded), and allowing markets to rise back to or near previous highs in relatively short shrift.
2. Worst case, second least probable... stocks follow historical patterns by retesting mid-March lows and -- sensing the coming storm -- crash through the lows. 35MM+ lose their jobs. Wiping out every job created since the recovery began in 2009. Sending the S&P 500 beneath 2,200 and stopping only when economic and market clarity provide a clear sense of where valuations should be. Right now, this is made all the more difficult by the fact that some companies have simply stopped providing guidance because of the lack of substantive data and information (no clarity).
3. Most likely scenario... stocks follow historical patterns by retesting mid-March lows (2200 on S&P 500) whereupon they find terrafirma, and begin tracing out a bottom. After a period (weeks, months?), clarity returns and fundamentals take over. Amid the tension and anxiety (What's next?!), the outlook improves and data reveals an expanding labor force and growing measure of confidence in the consumer and commercial communities. Markets begin to rise off that base as a sense of balance is restored to the galaxy.
Option three remains most likely. Yet that probability has decreased mightily as scenario one, the least likely, provides increasing amounts of evidence as to its viability. Much of which points to the idea that yes, a V-shaped recovery is not only plausible, but in play. Were that the case, the big question becomes whether the Fed can heap enough liquidity into financial markets that it succeeds in overwhelming the economic damage from the Covid crash. The data expected these next two months will reveal the extent of the damage, and the reality of the landscape we must traverse. Leaving few scenarios ending in higher equity markets.
Right now? The Fed is prevailing. But, doesn't the Fed historically play the recessionary culprit? Not the white knight endeavoring feverishly to stave off financial despair. Yet, here we are. Staring down evidence bolstering the argument for the Fed's valiant -- and thus far successful efforts -- and today's bullish trends.
We will soon see that we already sit squarely in the midst of a recession. GDP has plummeted like dad's Prom night curfew expectations. One minute? See you at midnight! Then its 8:30 am and you are still out on the town.
Among the many engaging aspects of our profession? The fact that successful investing remains rooted in the challenges of overcoming our own fears, biases and limitations so that we might effectively steward investment capital towards positive outcomes. Like Gulliver facing the Lilliputians on the beach, global investors will long be constrained by biases, prejudices and self-limitations. Investing is not a natural act. Like jumping back from a snake. Or avoiding a poisonous spider. Investors contend with "Recency Bias." Which causes us to place a premium on that which has happened most recently. As opposed to that which happens most frequently throughout history.
This limits the success of most investors. Who end up deriving more satisfaction from not losing capital than making money on invested capital. They become too emotionally invested in investment outcomes. And tend to do the worst possible things at the worst possible times.
What's the difference between traders and strategists. Strategists are entertainers. Talking heads with impressive resumes who have no skin in the game. Traders, on the other hand, must meet the critical standards of a profit-and-loss statement. They say little. But their methodologies had better hold water or they'll soon seek new professions.
Today, erudite professionals make viable arguments for bullish and bearish scenarios.
Marko Kolanovic, global head of quantitative and derivatives at JP Morgan Chase, has told clients that the stock market could rebound to normal levels sooner than people think. Actually, he expects markets to rebound by 40 percent. Possibly reaching record levels by 2021. If he's drastically wrong? His reputation may suffer. He may face career risk, which could prevent him from further hyperbolic pronouncements. Which, ironically, may make him more effective in his future assesments. However, Kolanovic, a bright man with a sterling resume, is not paid for accuracy. But to make bold pronouncements that may bring you back to JP Morgan's research, investment bankers, asset managers and investment advisors. JP Morgan's traders? Slaves to their P&L statements (profits and losses), they realize their bonuses and futures depend on their ability to make money for the firm. Entertainment isn't their game. Making money is. They've got skin in the game.
Mark Vitner, senior economist at Wells Fargo Securities, forecasts a slower recovery. Economists arguing with strategists? Hyper-educated water cooler talk. Like Al Michaels discussing the Run-Pass Option with Collinsworth. Fun to listen in. Little nutritional value.
We laud the seed corn of optimism driving the notion that equity market could recover in a V-shaped snap-back. Such positive thinking appears to have kept the S&P 500 index stuck on the 2940 resistance/support level like flies at a Memorial Day grill out.
The index now hovers at 2940. Awaiting a catalyst. Like a planetary body unable to break from the gravitational pull of a larger mass. Stuck until other forces combine to pull it free.
We think stocks will eventually face ferocious, door-to-door fighting from bears and seek safer ground. Short of some counter-intuitive news, the jury is hung when it comes to the source of credibly positive news that would send stocks higher. Especially given that markets have performed so well, of late. Feels like the next shoe is hanging off the big toe like a Serrano ham from a hook in a Spanish tapas bar.
Can Fed decisiveness and liquidity really win out over the reality of what has occurred since January? Of the seeming inevitability that lay before us?
Fed forecasters believe we're already in the depths of a massive downturn. Q2 economic news will be dismal. Demand has hit bottom and businesses are negative about future prospects. Expect near-term pessimism (consumer and commercial) to increase.
Meanwhile, Macy's, Neiman Marcus and J.C. Penney teeter on the brink of bankruptcy. If they haven't already sought creditor protection. All-American retailer J. Crew already filed.
I was a fan of J. Crew's clothing in college. And since then, really. Couldn't afford it. But I worked hours each week at the Von Lee movie theater in Bloomington to afford a roll-neck sweater or some washed out, all-American khakis. Were the women of B-town to notice me dishing out movie tickets and buttered corn in my clip-on tie and faux rayon cummerbund, they'd soon forget when popcorn guy dashed across campus in his carefully considered yet effortless looking J. Crew threads.
History is a rigid taskmaster. Historical trend point to a big move lower. But, as those dealing in risk and probabilities teach, when everyone expects the same outcome, the chance of the opposite happening increases. History teaches that things that have never happened before will eventually happen.
Because recessions have always been accompanied by bear markets, we know this market must sink again. Thought it already fell 34 percent, doing so faster than any other bear in history. So perhaps the next move is higher.
Meanwhile, we watch the nation slowly re-open following a stint in CV19 prison.
In lovely Ohio, consumer, retail and service businesses have flipped on the lights. Salons, barbershops, outside restaurants and patios came next. Last week brought the partial reopening of restaurants. Bringing my my wife to heightened levels of joyousness.
Shocking that these venues have been closed for three months. The reopening can't occur a moment too soon. What's next?
As investors, we need to carefully think about what lay on the horizon in six to eight months. The media, a resolute creature of doom, gloom and incomplete educations, will tell you that the situation has never looked worse. Nor are they wrong. But does the media understand what truly drives market returns? Why should they start now? Investors should focus on where we're headed, and the potential for an economic rebound later this year.
Like Sherlock Holmes discerning all the crime scene details in order to construct the crime scene's puzzle, investors must harness all facts, trends and patterns available in order to chart the proper course.
Historically, what transpires during these periods? Which asset classes win and lose?
Markets often see an elevation in "hard assets" prices -- the ones the Fed can't print. One of which is gold. If interest rates remain negative for the foreseeable future, then history says gold will likely move higher, as shown in the following chart by mapping gold's path during the tumult of 2011 and 2012.
Moreover, negative rates and panic-induced selling has also led capital flights to asset classes like Treasurys and gold stocks. We've also seen similar activity, of late, in Bitcoin and other crypto currencies.
Our team remains focused on the next curve in the road. There will be plenty of opportunity for those operators who conduct themselves unemotionally in the months ahead.
Courage is not the absence of fear and despair, but the strength to conquer them. In the months ahead, investors need to maintain the courage of their convictions. Because they will be tested.
Robert Kraft, owner of the New England Patriots, is fond of saying, "The key to life is to try and see things other people cannot see." Very relevant in today's investment environment.
So quit the hand wringing. Time to move forward. Seek opportunity. Avoid undue risk. And preserve investment capital as markets do what they always do. Providing savvy, prudent investors with the chance to discern formerly unproductive paths that might now lead to hidden treasure, blinding opportunity, and the chance to hone our investment and capital allocation techniques amid challenging conditions.
The United States has rarely failed in its efforts to restore structure, the rule of law and economic vitality when crises erupt. Ranking among the few nations that view difficult situations as problem solving opportunities.
Saturday, Elon Musk's SpaceX and NASA sent two astronauts into orbit, marking the first human launch from U.S. soil in nearly a decade. And firmly establishing a new partnership between industry and government aimed at revitalizing American space ambitions.
SpaceX, working with NASA, took a quantum step towards establishing the trajectory for space tourism. Moreover, the project has highlighted the efficacy behind the public-private partnerships proposed to explore the moon, and eventually set the stage for ventures deeper into space.
Just another day in the Land of the Free and the Brave. Onward and upward!

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