The stock market and Corona

If there are no more spikes in outbreaks we are on track for more shops opening in two weeks.

But while fashion stores may reopen with deep discounts to clear old stock, most online retailers have already been offering sales to encourage shoppers.

For clothing retailers they are currently holding out of session stock, and the supply lines for a lot of them are currently shut as well.

This makes it likely we will see mass discounts to clear the old stock while ramping up production of new items as quickly as possible to get the stores all back in session.

I think there is a lot of hope, but then we perhaps need to consider reality of countries that are a few months ahead of us:

Also, to put yesterday’s bounce into context:

All while volume remained below average. I haven’t changed my bearish stance, markets are crazily overvalued.

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The markets have been overvalued for a while, even before the pandemic. I saw an interesting discussion which said is an overvalued marker the new expectation, or just the result of the current fiscal policy?

I am bullish overall on the markets, largely due to the policy makers fearing any immediate economic crashes.

I doubt there is a V shaped recovery, we will keep bouncing for the foreseeable future. That creates short term opportunity but I guess the larger questions are:

  1. When we will be back to “normal”?
  2. What does “normal” now look like?
  3. What state does the market enter normal?

Will we see multiple bouncing corrections, and/or a sharp correction upon the pandemic been declared dealt with (which isn’t for another 8-12 months.)

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A good friend of mine was discussion about interest rates now and post pandemic.

He raised the point that the way we value money may have to change. After being stuck in low interest rates for so many years, and now this global pandemic, we might be looking a serious economic shift.

The thing though is that the global economy had already been slowing since 2018, with many countries already experiencing an industrial recession. Interest rates for most western countries have been near zero, and like you say, have been seen as the norm. Households have very low savings with savings ratios at historical lows due to low interest rates and increasing expenses. Companies are crazily over leveraged as credit was cheap, so it was easy to borrow on the promise of future growth.

The virus couldn’t have come at a worse moment as our economies were already floundering and central banks have few mechanisms left, other than below zero interest rates and QE Infinity - neither worked out well for Japan, whom experienced FOUR recessions since 2008.

The US stock markets are near ATH with select stocks already at ATH, whilst 30m+ people are unemployed, CPI fell off a cliff, oil went momentarily negative, and now even the Fed is forecasting annualised -30% GDP for Q2 and years before we have recovered.

Reopening the economy and then thinking that it’s all puppies and rainbows is an illusion. The Far East has shown that, and spending patterns will have changed at least for the intermediate term. Let’s not forget the US economy is 70% consumer spending, what will you spend when you’re out of work, or how much will you spend when you’re worried about your job? Data has shown that of the 30m+ unemployed, at least 2/3 are continuing claimants who won’t have a job to go back to easily, and the wave of bankruptcies has only just started.

At on top of that the Q1 earnings were bad, imagine how they will be in Q2 when they reflect a full quarter of lockdown. People say the market is forward looking, but economic gravity will take hold eventually.

Although the market has been going up, its now in a side wards movement with lower highs and higher lows. It’s consolidating, but against the backdrop of lower volumes - this indicates people have lower conviction.

The market is driven by hope, and greed, rather than anything else. People discount negative news and exacerbate the good news. Powell was on Friday very negative about the economic outlook, even though he presented it as a shit sandwich, and the market didn’t care and instead rallied on the hope of a tiny trial of Moderna, a company that has been numerous times likened to the next Theranos and were conflicts of interest are so bad, I would argue it’s at best cronyism and at worst corruption.

The market rally has been driven by a tiny amount of FOMO stocks that the retail sheep en-masse flock too, but the vast majority of stocks have been down. Currency, bond and commodities markets get it. International stock markets do too, it’s just the US stock market is the exception as other countries don’t have “pump channels” like CNBC where talking heads like Jim Cramer irresponsibly shout “buy buy buy”.

The market tethers on a precipice and it won’t take much - either opening of the economy and re-emergence of COVID, or Q2 earnings that will result in a wave of bankruptcies.

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From cnn business

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Moderna potentially getting SEC attention for share offering prior to statistics around their potential COVID vaccine, which with hindsight weren’t as convincing as they led everyone to believe.

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I’m guessing the SEC will be extra busy. Lots of small-cap pharma companies are seeing massive share price growth after doing anything pandemic related.

With such long timescales and a vaccine so far away (even with special measures in place to increase the normal pace), lots of investors are trying to chase the firm that cracks it. Lots of companies will try and take advantage of this sadly.

Indeed, I got small exposures to seven biotechs. Trying to ride that wave as well, but the party won’t last.

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First negative gilt has been issued.

The UK government joined a select group of global peers being paid to borrow this morning as demand for the sale of a three-year debt issue sent average yields to below zero at -0.003%.

Policymakers on the Bank of England’s monetary policy committee have been increasingly prepared to hint at a willingness to follow the European Central Bank in pushing borrowing rates below zero. The bank slashed rates to a record low of 0.1% in March.

The cost of the government’s response to coronavirus is likely to top £123bn the Office for Budgetary Responsibility estimated this week, and lift total UK 2020/21 borrowing to £298bn, almost double the £160bn envisaged before the virus struck.

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Never quite got what negative gilt yields mean for yield prices and investors.

I’ll try a quick summary. I’m sure the guys here will correct me if I miss anything.

Mathematically a gilt/bond can’t have a negative yield. This is the calculation of the annual coupon dividend by sell price.

e.g. I pay a coupon of £5 and the selling price is £100. My yield is 5%.

Unless a gilt is flat out paying negative interest (meaning you just get back less at the end) you can’t really have a negative rate.

Given most gilts give a coupon this doesn’t work. The attraction of gilts is cash flow. I want that guaranteed (almost) interest payment.

However, yield to maturity takes into account how long you hold this gilt for and the par value (the amount you get back at the end of the period.)

Keep in mind this only applies if you buy the gilt and then hold it to maturity.

e.g. You pay £100 for this gilt, it lasts two years and pays out £5 a year. Assuming you get back £100 at the end of two years the YTM would be 10%. You put in £100 and after two years walked away with £110.

Now let’s say you get back less than what you paid.

e.g. You paid £100 and you get £5 a year interest payments, and this gilt lasts two years. At the end of two years, I pay you back for £80, rather than the original £100. You get back £80 plus the interest payments worth £10 meaning you paid £100 and got back £90. You have a negative yield to maturity of -10%.

You can get more advance by adding in the rate of inflation, and the “value of money” where the interest payments mean you are losing buying power over time, but that is a different story.

Bottom line is why would anyway buy a negative-yielding product.

Either, you don’t intend to hold onto it until maturity. e.g. interest rates drop and suddenly these interest payments become valuable increasing the value of the gilt (higher value but same payment pushes the yield down, £110 to buy it but it’s still paying £5 a year mean the yield is now 4.55%~.) Or you hold to maturity because you want reliable payments. If you are a pension fund, for instance, you need cash flow. You’d rather lose out with a small negative yield but at least you can pay all your customers in drawdown reliability.

Generally, higher gilt yields mean weaker equity prices (why invest in risky stocks when the government is guaranteeing payments?) and the flip is true as well. Negative yields push more people into riskier investments to try and keep up their own rate of return. If I can’t make £5 a year with gilts I’ll find an investment which can.

Though recently in America we have seen bond and equities prices rise together so I guess people are simply unpredictable.


Shifted my pension mostly into treasuries, will have to check now exposure to countries with negative gilt/treasuries yields.

Never a dull day! :smiley:

Double check the funds to see if they hold these to maturity and how they rotate the gilts/bonds around. Some use a futures index, others invest directly and hold to maturity and buy regularly.

As long as a country isn’t in negative yield for multiple years i.e. Japan it shouldn’t have a meaningful impact. Longer term when the different time horizon’s start being sold negative and the government is only offering negative (not even in real buying power, just flat out negative yield to maturity) then that’s a meaningful shift.

Personally my pension has very little bond exposure, but I am happy with a higher risk pension (13% annualised volatility, lots of emerging and development market equity trackers.)

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One aspect of the lockdown and social distancing that we haven’t really seen in London is the acceleration of drone tech.

This might prove to be a short term growth opportunity to prove the usefulness of their tech and solutions. The ultimate aim being post-lockdown regulators allow for more automated or remote logistic solutions.

The drone delivery space and drone taxis is a space I find very exciting personally, but I haven’t looked at it from an investment perspective. In heavy urban cities like London it would be extremely tricky (we have extremely strict airspace rules within the city) but this lockdown might ease up some temporary exclusions.

That aside, more rural communities could make sure of the tech also, I guess it comes down to the local powers as to what is allowed, but also where these firms are based and testing.

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Some insight into the aviation industry.

EasyJet, which has big operations at Gatwick and Luton airports, confirmed it would restart flights on 15 June.

However, it said that levels of market demand seen in 2019 were not likely to be reached again until 2023.

  • British Airways, which is set to cut up to 12,000 jobs from its 42,000-strong workforce
  • Ryanair, which is set to cut 3,000 jobs - 15% of its workforce - with boss Michael O’Leary saying the move is “the minimum that we need just to survive the next 12 months”
  • Virgin Atlantic* which has announced it is to cut more than 3,000 jobs in the UK out of a total of 10,000 and end its operation at Gatwick airport.

From 8 June, people entering the UK from abroad, including returning holidaymakers, will be told to isolate for 14 days or face a £1,000 fine.

The airline said it would release half-year results, covering the six months to the end of March, on 30 June.

It’s going to be very tough for the retail airline industry, interesting numbers around a three-year recovery to get flight numbers back to a 2019 level again.

I took a short term punt on SouthWest airlines as there is a wave of euphoria around “economy re-opening” stocks, being fully aware that the party won’t last so will rotate after some quick gains.

We also seem to be rotating from tech into financials, and perhaps energy and industrials sectors. Again, riding that wave for the moment.

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A lot of impressive results coming out for investment houses and banks with strong investment/broker arms.

A few winners in the fund management world but a lot of funds are seeing outflows into more exciting prospects or funds that have weather the storm better or simply have seen a stronger recovery.

Tech is always overpriced and sensitive, but with tech being a bigger part of finance we are seeing a few firms start to blur the lines a little.

Energy sector is an interesting on. My UK based wind farm investment trust is back to positive even after it’s dividend payout, I generally let that tick along as a safer investment so I’m surprised it’s positive already again.

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I have to say that I have been totally blindsided by the market behaviour recently. I moved most of my positions to cash when I anticipated the initial shock from Corona. What I couldn’t predict is the “recovery” we have seen across many sectors and indices in recent weeks. I think a lot of this is to do with the fact that many central banks and Governments have been throwing the kitchen sink at it to support markets and the economy. How long can it last?

I also think a lot of it is the fact that companies were announcing for periods pre-Corona or Q1 during which the impact was minimal. I worry that Q2 earnings will be dreadful across many sectors. But then again I could be completely wrong and the markets will continue to recover back to where it was at its peak.

Out of curiosity have others been surprised by how markets have reacted recently?

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The us stock market is totally divorced from reality. 30m+ unemployed (2/3 of those continuing claimants), -30 to -40% annualised GDP for Q2 forecast, riots erupting in cities, looming trade war with China, and not to mention that the credit cycle and bankruptcies barely have started.

Q1 earnings were bad, and they covered only 2 weeks of lockdown, imagine how q2 earnings will be like, especially as many companies like Netflix frontloaded user growth in Q1.

The market is driven by the Fed injecting liquidity. But you can’t solve a demand crisis with a supply solution. They can’t fix a solvency issue with a liquidity approach. The Fed can’t print jobs.

The market rally has been driven by tech, and within tech its been driven by a very small amount of companies. Those have now run out of steam, as we have seen this and last week when growth rotated into financials, small cap, energy and other sectors that were the worst affected. They got duly slapped down yesterday again.

The big rally is not atypical for a bear market rally, there typically is a sharp downturn followed by a relief / hope rally. It sucks in the dumb money, gets accelerated by short squeezes, and then eventually starts to move sideways like we did the last few weeks on lower and lower volume.

The last few days volume spiked. Many think it’s the bears capitulating. If that’s the case, that’s typically a sign that we are near or at the top. Not to mention that S&P 3,000 got breached, and those big round numbers have philosophical meaning. Can 3,000 be justified if 25% of America is out of a job?

I have been a bear this whole rally, and thus missed out on some gains, although my portfolio YTD is still +15%. However, my portfolio is defensively positioned with treasuries, investment grade corporate debt, gold and healthcare, and some select consumer stables. I doubt the party will last, but I have been saying that for a month now! :joy:

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