Unless you’ve been living under a rock or you’ve been on an “unplugged” retreat, you know about COVID-19 and the havoc it’s caused worldwide.
There’s no need to review what’s transpired thus far. Instead, I want to cover the virus’ economic effect and what Cornerstone is doing as a result.
A Frigid Economy that Will Thaw
Due to the fears of COVID-19, but even more so because of the government’s mandated shutdown measures designed to halt the spread and try to reduce the stress on the hospital system, we’re on the front edge of the sharpest decline in economic activity since the Great Depression.
Prior to all this, we were on track to grow the economy about 3 percent in the first quarter of this year. But we all know the March reports will be brutal.
Unemployment claims last week were projected to be around 1.5 million or so. To give some perspective, our last recession generated a peak of 665,000 weekly unemployment claims.
Well, the projections were off. Unemployment claims hit nearly 3.3 million.
So, our best guess – and anyone claiming anything other than a guess at this point shouldn’t be trusted because nobody knows what’s ahead – is the economy will retract about 35-40 percent in March and April, based on an annual rate. Specifically, in the second quarter (when most of this will hit), we’re expecting an annualized drop of 20 percent.
However, we expect the economy to start growing again this year. Our projections show a growth rate of about 3 percent per year annualized, beginning in the third quarter. We’re optimistic because, in our opinion, we don’t need to fully eradicate COVID-19 to start growing again.
The largest downward pressure on the economy will be felt up to when the number of new cases peak. That’s an important metric because we need to mitigate as much pressure on the hospital system as possible by “flattening the curve.” Once we hit that peak, we’ll hopefully see restrictions eased and get back to some sense of normalcy for businesses and their customers.
Economically, the most important thing is bridging the gap between the government-induced economic coma we’re in and the end of April. It’s obvious that small businesses and households need help immediately. Thankfully, the federal stimulus package of “helicopter money” will go a long way towards that end as we view it as a type of “bridge loan” for America.
That’s why we believe time is of the essence to begin to start economic activity again in April. Doing so will prevent the future erosion of living standards, which could become more problematic than the virus itself.
In the end, we believe in free market capitalism. We trust it will lead us to a quick bounce-back from any viral recession. The economic pains we’re experiencing are because of the virus not because of underlying financial system fundamentals causing problems, like in 2008.
Managing the Chaos
Understanding all that, how are we as a firm trying to minimize the financial damage from COVID-19?
If you’re a client, you know early in the second week of March we moved all our active portfolios to a 50-percent cash position. This allowed us to fend off the market’s continued downward decline. Crucially, this position doesn’t force us to time our market reentry, which is a fool’s errand.
That’s a good thing because the selling has been unprecedented.
The yellow column in the chart below shows selling percentages well above 100 – that has never happened before. It means that if a certain sector has 100 stocks in it, the previous week saw at least 190 stocks sold, meaning those equity positions were being sold many times over.
In addition, two weeks ago there were multiple days in which 99 of every 100 trades were sales. That’s not sustainable. However, as we get more clarification on the virus’ impact, the federal stimulus packages, and the economy restarting, the selling will flip to buying. In fact, we’re already starting to see it.
The question for us becomes when to redeploy that 50 percent of cash. Obviously, it will be at a lower price point than when we sold, which tempers any loss for the entire portfolio and will result in better values in equity positions than before the pandemic.
To be clear, nobody rings a bell when the market bottoms out. We never look to a price for deploying capital in the market via a structured rebalancing strategy. We dive deeper and stick to our plan. Currently, here’s what we’re looking for to reignite the investment engines.
Federal Stimulus
This critical aid will allow businesses and households to pay bills during the slowdown. More importantly, it will keep them around for when things come back. That’s good because we’ll need everyone to drive economic activity at some point.
Health
Flattening the infection curve and protecting our medical infrastructure is essential. When we reach the peak of cases, we think the nation will start returning to work, but will do so with more guidelines on interpersonal interaction and a “new normal” for all.
Credit Markets
Whether stock markets are going up or down, the credit markets always move first. It’s why the Federal Reserve’s bond buying program is so vital. It provides some stability in credit and equity markets in these times of uncertainty.
Volatility
The Vix Index gauges overall market volatility. Last month, it hit the 80’s and “calmed” some when it dipped to the 50’s. Neither measure is desirable. In normal, non-crisis times, the index average is about 16-18.
Market Volumes
We’re closely following buying and selling volumes. Before redeploying capital, we want to see a consistent run of days where there is more buying than selling.
As all these conditions are met, we will look to get back into the market in full force through a staggered rebalancing schedule, not all at once. Until then, caution and care rule the day. Stay safe.
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.