Let’s review a little history lesson, brought to you by Cornerstone Financial Services.
Today, we’re going to look back to better understand the Covid-19 economy. Of course, we first need to thank our “sponsors” for making this possible – time and hindsight.
In all seriousness, it appears we priced in a recession one month after the S&P 500 hit an all-time high of 3,393 in late February.
Then, we priced in Armageddon in the third week of March, with the S&P 500 dropping to 2,192.
And by mid-April, it was back up to 2,875. Thus, we began to price in the “coming economic recovery.”
Feels like Whiplash
Our analysis tells us the market is ahead of itself in thinking the recovery will be as fast as the decline. That said, the fiscal stimulus at work now is even bigger than in 2008.
Now we’re in a market that’s pricing in recessions and recoveries from one month to the next, which is a much shorter-term viewpoint than usual. We went from economic expansion to a sharp recession, completely skipping a slowdown phase in between.
By aggressively buying investment-grade and high-yield bonds, the Federal Reserve is supporting the stock market, and for that matter, the entire economy. It’s allowing risky borrowers to access funds at rates that wouldn’t otherwise be available.
These moves have added $2.06 trillion to the Fed’s balance sheet in the last five weeks. But it’s working for the time being, from a market and economic standpoint. Still, the strategy can’t work in perpetuity. Where is the breaking point?
We must remember that without an economy, paper value – no matter how much is printed – has no value. This is where the risk of hyperinflation comes into play.
Scary recent examples of hyperinflation can be seen in Bulgaria (1996) and Venezuela (currently). Do we want to live in a country that imposes price controls? Similarly, do we want to pay $500 for bananas? Those questions are as rhetorical as this statement is obvious: The Fed must be cautious.
Ultimately, we think Covid-19 will be resolved when it comes to its correlation to U.S. gross domestic product. Policymakers won’t forget what makes the U.S. dollar strong or the dangers of hyperinflation.
Where are we Now?
Cornerstone always asks what the data say. Right now, they show market volatility settling, causing new leadership to emerge from an industrial sector perspective.
Technology and health care firms are the unquestioned leaders, as this sector strength/weakness table attests.
But again, we need to keep in mind this leadership and increase in sector strength is happening without daily big money buy signals. The lack of buying is a direct reflection of the drastic washouts we saw in the past few weeks’ normalization.
The sector rankings are also a reflection of our views (and portfolios), which is why the top four sectors are where we have direct exposure in our satellite positions.
Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.