The stock market and Corona

From Barron’s:

“While the fiscal rescue package, in combination with the Fed’s monetary stimulus, was enough to rally the market, it remains to be seen whether it is enough to plug the gaping hole in the economy that is just around the corner. More than three million Americans filed for first-time claims for unemployment insurance in the week ended March 21, and economists say the numbers will get far worse in coming weeks.

Stocks could still head south toward their recent lows, or even tumble further. “Every time we see those numbers, the market will act like it’s a surprise and go down,” says Peter Andersen of Andersen Capital Management.

What’s more, the financial stimulus and corporate rescue measures might not bear fruit commensurate with the trillions of dollars that will be spent to survive this crisis. Wolfe Research strategist Chris Senyek says it would be “shockingly good” if each dollar spent translated into 50 cents of GDP growth. “This package will help improve consumer, business, and, especially, investor sentiment,” he says. “However, we’re not that optimistic about the fiscal program’s ability to boost GDP growth.“

Personally, I am pretty sure last weeks rally was a typical bear trap and that soon the sentiment about the stimulus will wear off as reality around Corona on the short term (the US is now the epicentre, or soon will be) and it’s economic impact on the medium term (reporting season begins in April and runs through May) sinks in.

I think we will get a retesting of the 18th March bottom, but that we will sink there not in a sharp fashion but in a more gradual fashion as bad news drip feeds out.

I have gone mostly into cash and am sitting on the sidelines - I sold nearly everything into last weeks bounce. A few stocks I held onto, as I would have to sell them at too great a loss and they’re quality companies so will eventually rebound.

My plan is to max my ISA this year out in cash, then come 14th April max next years out in cash straight away and sit ready to pounce.

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I am in this camp in general. Some of my long time holdings have been hit hard such as Disney but at the end of the day, I ask myself: does this company have enough levers to be stronger in another 5 years? As a result, I didn’t do much to my portfolios as all of them continue to tick the quality box.

Am so with you and “buy and hold” is typically my strategy, but I had a feeling that it would be a bull trap as the market didn’t react rationally to the stimulus package given how poorly the USA reacted to Corona, so I took a punt and sold into the bounce.

Am quietly confident that it’ll drop again and if it does, after all, the market rallied whilst VIX remained largely stable and above 60, whilst other asset classes were tanking. I may be +20% in profit. It’s a risk though!

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Hello again Marsares :wave:

I’m in the same boat as you. I have tons of red that I want to hold forever. If I wasn’t looking for a new broker that is!

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Buy and hold is a good strategy for the long-term investor, so is averaging down typically - although I am not a fan of the latter during a crash.

However, I want to build a bit more risk management in my process. Time in the market beats timing the market does apply, but for every 20% drop, you need to see a 25% uplift to get back to where you started, so it’s good to try to avoid the dips if you can.

As a retail investor, that is nearly impossible to do unless you either get lucky or are a near-professional. But in this instance I think the writing is on the wall.

Next week, a new wave of earnings could shed more light on our socially-distanced economy, plus we’ll get new data on jobs and consumer confidence. I suspect it’ll be dire and the market should react accordingly.

A worrying stat:

Meanwhile, US consumer confidence at its lowest since October 2008, and company closures have barely begun:

Perhaps not surprising then that Bulls are now only 23% of investors - at the 2009 low they were 19%

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From Barron’s:

“A few simple figures highlight the stark situation investors are likely to face. U.S. equity valuations are marginally above long-term norms, and index levels imply about zero growth in earnings per share in 2020.

That’s absurd.

If, as many forecasters anticipate, the economy contracts at a rate of 20% or more over the coming few months, and then experiences additional shocks when public health measures falter or seasonal effects appear, not only will earnings fall by as much as 25%, but uncertainty will force a large contraction of valuations.

From here, it is easy to imagine another 25-30% drop in the stock market”

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My optimism partly comes from this chart

Every major country is doing stimulus. What I would like to see is more fiscal stimulus.

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Another reason for my optimism

I am an eternal optimist, but in this instance I remain very much bearish.

An interesting quote of Tony Dwyer, chief market strategist of Cannacord Genuity:

It feels like last week was a relief rally, but that now sentiment is starting to wear off. Investors are starting to see the obvious: $2 trillion won’t be nearly enough to end the crisis in the markets. Health spending alone may require trillions more.

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Some more bearish views, although may be biased and being a bear myself at the moment, latch onto similar viewpoints:

“The majority of PMs (portfolio managers) believe last week’s rally will fade now that the U.S. stimulus package is law and deeply negative economic numbers are ahead. Until investors are confident peak Covid-19 cases are near and there is more clarity on when the economy will reopen, front month implied volatility will remain elevated, constraining valuations,” explained Evercore ISI strategist Dennis DeBusschere.

The economy is going to put up some shockingly bad headline numbers in April and May, which will probably be the driver of lower stock prices. A few economists I have talked with suggest the April employment report could show way more than a million in headline job losses. Yes, you read that correctly — keep in mind the worst employment report during the Great Recession came in March 2009 with a decline of about 800,000 jobs.

Last week, Oxford Economics chief U.S. economist Greg Daco said on The First Trade the data in the weeks ahead will be catastrophic. He is dead right — and how could catastrophic data be priced into this market that has rallied hard off the lows?“

Source: https://flip.it/ejfYrU

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At the moment we’re going through an end-of-quarter rebalancing of asset managers, many who will dip into equities due to their lower valuations, and this may drive prices up or at least keep them level in face of an ever high VIX.

However, I wonder if this will add to the dire economic news that will come out and put a further dampener on prices:

these pension funds take an 30 year view here, and they don’t worry about outflows :slight_smile:

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Another bearish view:

“Investors are using the stock rally to reset hedges rather than chase upside, signaling little conviction in the rebound, according to Credit Suisse Group AG.

Investor sentiment remains extremely cautious as can be seen in equity-skew measures re-steepening significantly,” Xu wrote in a note Monday that declared there’s “no faith in this rally.” “In the options market, investors have taken advantage of the bounce by resetting hedges, rather than adding to longs.”

Source: https://www.bloomberg.com/amp/news/articles/2020-03-31/hedge-demand-shows-no-faith-in-this-rally-credit-suisse-says?sref=uHY27eog&__twitter_impression=true

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The recent rise in the last week or two definitely feels like a dead cat bounce. I’m still holding my investments for the long term, and following my normal monthly buying patterns, but not sure how many other ‘bargains’ there are out there right now.
Some companies e.g. Uber, Apple, are now at prices they first reached 6 months ago. To me, stopping much of the global economy should reset things a bit more than that?!

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Agree with you. My holdings at FreeTrade are 80% in cash now, and got more cash ready for the 2020 ISA.

A few companies I may consider buying now, but like you I find that most are still overvalued and that we need a bigger dip before it’s a real buying opportunity.

I think there is a disparity between professional and retail investors.

Retailers seem to either follow “buy and hold” and won’t sell even when hell freezes over, or follow a “buy the dip” strategy, because they have no concept of the macro environment.

Professionals are increasingly hedging, or they are sovereign wealth funds that take such a long term view that they don’t mind selling at a loss if their hand is forced.

I am finding the narrative turning more bear-ish, on Twitter most seem convinced that it’s a bear trap and are holding out. The mom and pop investors haven’t capitulated yet though, but when corona and economic news gets worse, even the fed may not be able to save them.

Was just reading this on Barron’s: “ Global Economy Could Take a Depression-Like Hit From Coronavirus, Says Harvard’s Rogoff, Who Has Studied 800 Years of Crises”

Edit: I am just thinking if us stock prices really are going to stay the same if these forecasts become reality:

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From the Atom daily newsletter, which is always a nice snapshot of the day:

“The S&P 500 futures trade 14 points, or 0.5%, below fair value heading into the final session of this bruising quarter. Stimulus action and rebalancing activity have helped the market rebound over the past week, but there’s little conviction being registered this morning despite talk of more fiscal relief and encouraging Chinese data.

Specifically, White House officials are preparing a “phase four” stimulus bill aimed at providing aid for mortgage markets and the travel industry, as well as state and local governments, according to Bloomberg . The package would total roughly $600 billion, although there has already been reported dissent on the bill.”

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The other thing to beat in mind about the rally of the last few days, and why I am convinced it’s a bear rally, is that the market has been rallying against an ever decelerating trade volume which is not a good sign.

Terrible situation to try and be timing the market. For pound cost averaging this will be a moment in their portfolio, but I do worry about trying to guess the bottom.

Still a lot of unknowns, and we haven’t felt the full impact yet. There is a lot of innovation happening very quickly and haphazardly, there could be a wave of consequences which arrive after the isolation ends.

I’m trying to avoid changing positions or loading up on any securities just yet.

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Agree, nobody can time the bottom with 100% accuracy, but you can make a judgement call whether now is the right time to buy. I don’t think so.

Consensus is way off reality, as people seem to believe that once the virus passes, it’s puppy dogs and rainbows. Global economy was already in a precarious position pre-virus, let’s not forget that.

  • 36% of Russell 2000 companies had a negative pre-tax income
  • 55% of small businesses won’t survive a 3 month lockdown
  • more than half of households have no liquid emergency funds
  • 27* of companies with a market cap of >$10bn has negative YoY EPs growth

All this was pre-virus. No Fed cheque can fix that.

Closer to home, UK GFK consumer confidence indicator dropped with 2 points to 9. The Lloyds business barometer dropped with 17 to 9, the sharpest drop since May 2017.

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