Broker Check

Welcome to the Eye of the Storm

| April 13, 2020

It feels like we’re in a lull right now.

Economically and socially, we’re stagnant. Most people are abiding by stay-at-home orders, and since many businesses aren’t open, there isn’t a lot of economic activity happening.

Psychologically, many of us have gone through the fear aspects of the virus, the economy, the market, and so on. There is a resigned acceptance for what we need to do to overcome COVID-19, which has created a state of uncertain calmness.

We’re sitting there. Are we just waiting for the other shoe to drop on this whole thing? Or is everything done with and we’re just waiting to be let outside to get things back to normal?

Four Forces at Work

At Cornerstone, we think there’s a lull right now because we’re in the eye of the storm.

The eye is the ironically calm center region of an otherwise strong cyclone. Inside the eye, things are quiet, despite the surrounding horizons being fraught with danger.

So, we think this uncertain calmness is because we’re in the eye. Our theory is based on four driving forces we’re seeing right now.

Payroll Protection

Two weeks ago the Paycheck Protection Program was announced as part of the federal stimulus bill. The program offers forgivable loans for companies to keep paying employees, leases, utilities, and other critical costs during the COVID-19 crisis.

The Paycheck Protection Program has provided some comfort that small and medium businesses will be able to survive this situation in the near-term because the Federal Reserve is acting as everyone’s bank right now. Hence, a relative economic calm.

What we don’t know yet is how long this will last and when businesses will actually receive the PPP funding. And that raises legitimate questions on the viability of many companies and their ability to survive, along with questions on how long the government can continue to support the program.

Flattening the Curve

You’ve probably heard the phrase “flattening the curve” many times lately in relation to slowing COVID-19’s spread. It is the path forward, per the medical experts. Encouragingly, we’re beginning to see the curve flatten in some of the hardest-hit areas, which shows our social distancing seems to be working.

Conversely, many countries have seen upticks in COVID-19 cases as precautionary measures were relaxed, even longstanding ones. This raises some key questions:

Will we see upticks in new cases?

How long will we have to alter our social dynamics, even as the curve flattens?

When will we get a vaccine?

What is the “new normal” and when will we get there?

Market Movers

The market has bounced back a bit over the past few weeks, which is a definite positive. We attribute some of that to a possible initial overreaction to COVID-19 and newfound clarity on the health crisis, its ramifications on business, and the remedies put in place thus far.

Diving a bit deeper though, we wonder if some of the surges could be investor FOMO (fear of missing out) related to bargains in the market. Such a herd mentality doesn’t include the support of fundamental data, which only begins to be released in the coming weeks. It’s purely emotional, and thus, most likely unsustainable.

Evidence for this viewpoint exists in the form of recent short covering and big bounces for the worst-hit equities in the worst-hit industries. We think it’s short-lived though. Corrective effects should take place as we get a truer grasp on the long-term damages for firms and industries.

Selling vs. Buying

We keep talking about how much buying and selling is going on in the market, especially in the big money index.

As these tables show, we’re seeing a big decrease in selling, which typically supports the theory that we’re near, or at, the bottom. However, the tables also show a lack of buying, and we haven’t entered earnings season yet or heard any resulting analyst projections for the rest of the year. Earnings determine returns. And for better or worse, analyst projections move the needle too.

So, it’s great that the bleeding has seemingly stopped. But we could see another intermediate-term bottom once all the data are digested and analyzed.

A Thoughtful, Safe Restart

Things are calm, but onerous skies surround us. This “eye of the storm” theory is consistent with our belief that the recovery will be W-shaped.

More negative data and bad news is sure to surface in the coming days, weeks, and months. For instance, one third of renters didn’t pay their April rent. What will May and future months bring? Have these sentiments already been priced in the market? Or will new downward selling pressure result? Time will tell.

As the shutdown lingers on, the risk of economic atrophy increases. In this sense, more time will almost surely mean a more difficult and painful recovery. Opening up faster means less long-term damage will be realized.

That said, the best way to curb against any additional downward market pressure is for us as a country to figure out how to balance the health care needs of this crisis with the economic need to strategically go back to normalcy. We need a restart with effective guidelines in place to keep everyone safe, healthy, and most importantly, prevent new cases from emerging down the road creating a false “restart” to the economy.

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.