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The U.S. Government Steps in to Support the Markets and the Economy

In the current environment, it is difficult to give a short summary of events from the last couple of days, let alone a whole week.  My apologies in advance for the lack of brevity.    

The situation for the last couple of weeks has been grim.  In the U.S. and other developed countries, new COVID-19 cases are rising exponentially.  Governments are reeling and trying to get a handle on things.  Businesses are closing down or scrambling with contingency plans for customers, clients, employees, and offices.  The markets are in upheaval with volatility levels not seen in decades.  The stock, bond, and money markets showed signs of stress.  And traditional safe-havens gold and U.S. Treasury bonds were volatile as well.   

If the capital markets quit functioning properly it creates additional risks.  And major industries such as airlines, hotels, and restaurants, will need assistance to get through this.  If the markets are left to get worse or businesses left with no support, the danger is that the current event-driven bear market could turn into a much worse structural bear market.  These are challenges that only governments can step in and solve.

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Searching for Perspective in Turbulent Times

Finding perspective amid a public health crisis and a sudden bear market isn’t easy. As simplistic as it does sound, I find it helpful to remind myself frequently that both will pass in time. And my personal view is that we will be stronger and more resilient as a country for what we have been through. The question is how best to protect ourselves and live our lives in the meantime.

Bear Market Perspective

Investment perspective may be easier to come by than insight into pandemics. Goldman Sachs has excellent historical data on bear markets. They fall into 3 categories: Cyclical (caused by rising interest rates, an impending recession and falling profits); Structural (caused by financial bubbles or structural economic or financial problems); and Event-driven (caused by a one-time external shock). What we are experiencing now is an Event-driven bear market triggered by COVID-19. The good news? Event-driven bear markets are on average much shorter and with lower market drops than the Cyclical or Structural bear markets. Event-driven bear markets fall on an average by -26% and recover in 7 months on average. Compare this to a Cyclical bear market with average length of 26 months and an average drop of -30% and to a Structural bear market with an average length of 42 months and average loss of -57%. If the past is a reasonable guide to the present, this bear market may be nasty but with a relatively quick recovery. Many economists, but not all, share this view and expect an economic recovery as soon as the third quarter. My view is that we need to be prepared for a wide range of outcomes because the pandemic is such an unknown.

COVID-19 Information Sources

Almost overnight, we are all inundated with opinions, explanations and suggestions about COVID-19. People mean well, but it can be overwhelming. My suggestion is to find some sources on COVID-19 that you trust and screen out most everything else (or risk going nuts-your choice!). I want sources that are as “spin-free” as possible, so I subscribed to a Johns Hopkins COVID-19 daily newsletter. Search for Johns Hopkins COVID-19 Daily Situation Reports to find and subscribe. I also set up a Google News topic search for Dr. Anthony Fauci, a widely respected and frequently quoted infectious disease expert. Lastly, the New York Times has lowered its paywall for its comprehensive webpage on COVID-19. (New York Times)

Please read on for more of the following: Medicare Covers COVID-19 Testing; Amazon Prioritizing Delivery of Household Staples; When Isaac Newton Worked from Home; Biden’s Rapid Recovery; The Butterfield Diet; and A Quote I Like.

  • Medicare Covers COVID-19 Testing: For those eligible for Medicare, this is welcome news although getting tested may be difficult for a while. As we know, a major COVID-19 issue is that our healthcare system is overwhelmed. One client pointed out that one positive in all this is that we get to learn on COVID-19, which is truly dangerous, but may help us to prepare for even more virulent infectious diseases that may come later. (Medicare.gov)

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Demand and Supply Shocks Hit the Markets and Governments Respond to the Coronavirus

It felt inevitable, but the Coronavirus was officially declared a pandemic this week by the World Health Organization.  WSJ  To say the global stock markets have been a roller coaster is an understatement.  Markets are moving forcefully as investors and markets try to digest, analyze and interpret the short and long-term effects of major news coming out every day.  The world is coming to grips dealing with both supply and demand shocks at the same time.  The supply of materials and products have been disrupted by the fracturing of global supply chains and the curtailing of normal activities is creating much less demand for many products and services. 

Up until a few days ago, most economists were not calling for a recession in the U.S.  OECD  Swiss Re  But the situation remains fluid, and the markets are already pricing one in at this time.  Axios  Travel has been curtailed at businesses, major public events are being canceled, and workers and students are starting to work remotely.  Economic growth is slowing but by how much?  It's tough to gauge.  And will the eventual recovery be V-shaped or a long slow grind?  The volatility of the markets is going to remain until virus cases stabilize and new cases start to recede.

Is it all doom and gloom?  No.  New virus cases are subsiding and people are starting back to work in Hubei province, the epicenter of the China outbreak. Reuters  Governments across the globe are moving quickly to initiate large monetary and fiscal responses to support economic activity.  Yields have come down precipitously which will lower borrowing costs for homeowners, businesses, and consumers.  The price of oil is down almost 50% in the last two months acting like a tax cut at the gas pump and for heating homes.  And going into this, consumers had jobs, savings, and low debt payments relative to income.  Gauging consumer spending and if it drastically slows down will be the focus going forward.

Thank you for reading The Friday Buzz.  Stay safe out there.  

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The Coronavirus Spreads and a Tectonic Political Primary Shift

The spreading coronavirus weighs heavily on investors, continuing to present economic risks that are all but impossible to quantify. Might it be clear by later in the year that the coronavirus has essentially been contained, allowing the financial markets to rebound? Of course, but it is also possible that, as the end of the year gets closer, the coronavirus may be continuing to spread in the US and globally, slowing or even stalling US and global economic growth. This degree of uncertainty is uncomfortable, but we need to plan on a wide range of near-term outcomes until a vaccine and treatment protocol are available, which may be months away.

Complicating it all, this is an election year, as if anyone needed reminding. The principal remaining candidates have radically different visions for our country’s future. Joe Biden’s stunning Super Tuesday performance completely upends the Democratic primary. (Axios) After this vote, Biden leads Bernie Sanders in the delegate count. It is still early, but FiveThirtyEight forecasts a 3 in 5 chance that no candidate will have a majority of votes for the first round of voting. Coincidence or not, US stock market futures were up sharply the morning after Super Tuesday. (FiveThirtyEight)

  • Fed Cuts Rates to Mixed Reviews: In an emergency rate cut, designed to pre-empt the economic impact of the coronavirus, the Fed reduced short term interest rates by 0.50% this week. (CNBC) Rather than reassure investors, the rate cut may have spooked the stock market which fell sharply in response. One theory is that the emergency rate cut signaled the depth of the Fed’s concern to investors. Another concern is that the Fed doesn’t have the tools to fix the problem. (New York Times) It’s clear to me that being Chair of the Fed isn’t all that much fun.

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Markets Continue to React to Coronavirus News

The markets were greeted this week with news that the coronavirus had spread in significance to countries other than China.  Many cases started popping up in South Korea, Iran, Italy, and more countries reported their first cases.  Investors were faced with the task of trying to gauge the spread and economic impact of the virus, which is extremely difficult to do, if not impossible.  With so many unknowns, markets sold off with steep declines as investors abhor uncertainty.  The big question is if company earnings will only be signifantly impacted for the first quarter or for the whole year.  Where we go from here will be dependent on the efforts by public officials to contain the outbreak and how severe the economic impacts are. 

  • The Virus' Impact on Company Earnings:  There is no doubt that the coronavirus is affecting company earnings though possibly in different ways.  The global travel and leisure industry is taking a big hit and it is difficult to get those earnings back.  Other business' Q1 earnings will be lower due to disruptions from the virus, but the companies feel it will be earned back later and not affect overall yearly projected earnings.  Marketwatch  BBC

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Earnings and Learnings

While US politics and the Coronavirus dominate the headlines, US companies continue to report their earnings from the last calendar quarter of 2019. Why do we pay so much attention to earnings? When we buy stocks, whether an individual stock or through a stock fund, we are buying a share of ownership in a future stream of earnings. As investors, we want to be pleasantly surprised by future earnings announcements, which are more likely to cause the value of the stock or stock fund to go up.

Earnings announcements are new information. And, of course, earnings relative to market estimates or predictions of those future earnings matter a great deal. Is it good news or bad news in aggregate so far this quarter? With firms comprising approximately 80% of the market value of the S&P 500 Index having reported, 49% of these firms beat their estimates by at least one standard deviation while only 11% missed by over one standard deviation. That is slightly better than historical norms. (Source: Goldman Sachs Global Investments Research and GSAM). Thus, we see the US stock market continue to climb upward.

  • Democratic Primary Odds: We are starting to receive more questions about the potential impact of the upcoming presidential election on portfolios, most understandably. We believe that it is much too early to make an informed prediction, beyond acknowledging that some of the candidates are going to be viewed as more friendly to the financial markets than others. As a source of prediction data, I like FiveThirtyEight which currently maintains odds on who will win the Democratic primary. But understand that none of these prediction or polling sources always get it right and that we may see major shifts right through the respective party conventions and up to election day in November.

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Coronavirus Still the Focus, Shrinking Populations & How to Fly Through Airport Security!

The fears surrounding the coronavirus that dominated investor's concerns at the end of January and in early February started to ease up a few days ago.  Reports started coming out that government actions in China had reduced new cases, meaning the virus could be peaking.  AP News  With that risk potentially diminishing and positive comments from the Fed, the markets reacted very positively, and stock indexes hit new record highs.  But by Thursday, China had reported a big uptick in cases and the markets reacted negatively.  So, for now, the virus is the big market mover and will be the focus.  Researchers are working on a vaccination for the virus, but it is in the early stages.  WSJ  Until the virus has peaked and is in the rear view mirror or until a vaccination is available, it will continue to affect the markets and earnings outlook.

  • Fed Speak 101:   The Federal Reserve Chair, Jerome Powell, testified before the Senate Banking Committee this week for the Semi-Annual Monetary Policy Support.  He commented on a wide range of topics and questions including climate change, inequality, and the coronavirus (which he said they are carefully watching).  Probably his most important comment was that the U.S. economy is in a very good place and that "There's no reason why the expansion can't continue.  There's nothing about this expansion that is unstable or unsustainable."  Yahoo Finance

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US Stock Market Inoculated Against Coronavirus?

The spread of the coronavirus beyond China is dominating the headlines, but US stocks are behaving as if the virus is not a material economic threat to the US. An Axios article theorizes that one reason is that there is no better alternative to US stocks. (Axios) The virus has made its way to the US with at least 11 confirmed cases, including 1 in Massachusetts. (New York Times) The Washington Post calls for a reality check, arguing that the flu is a bigger risk in the US than the coronavirus “for now”. (Washington Post)

  • US Economy Looks Solid: The latest data indicates that the US economy grew 2.3% in 2019. That is down from 2.9% in 2018 but is still a good number. Many observers believe that the trade conflicts have hurt business investment, perhaps offsetting some of the potential growth attributable to the tax cut. (Washington Post) Especially encouraging is the surprise private payroll jump this week, the best monthly gain in 5 years. (CNBC)  And Maine’s and New Hampshire’s jobless rates remain historically low. (Portland Press Herald)

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The Markets React to the Coronavirus

Imagine if the U.S. government ordered the states of Illinois, Indiana, Michigan, Ohio, Wisconsin and Minnesota to be quarantined.  No travel in or out of the area, people are discouraged from going outside, retail businesses have to close, and people can only work if they telecommute.  That is the current situation of Wuhan province in China, home to 50 million people in an area known for producing automobiles and agricultural products.  LA Times  It is an attempt to contain the outbreak for the new Coronavirus that researches know little about but are learning more about every day.  WSJ  The Economist

Stock markets around the world are watching for the economic effects.  U.S. stock markets dropped abruptly Monday on further news of the outbreak and quarantine.  Investors are reacting to how much the world's second-largest economy will be affected, which already was sluggish when in 2019 it had its slowest growth rate in 29 years.  South China Morning Post  Investors are also concerned about U.S. multinational businesses with big operations in China.  Starbucks closed over 2,000 stores and McDonalds, Pizza Hut and KFC were shutting down operations as well.  CNBC

By midweek, stock indexes were recovering.  But investors will be keeping an eye on any impact of the virus on the world economy and company earnings. 

  • Fed Meeting:   As expected, this week the Federal Reserve's Open Market Committee held rates steady.  The markets are focusing on the banks' balance sheet and the coronavirus.  Recently, the bank expanded its balance sheet by 400 billion dollars to provide liquidity to the short-term market.  In response to the coronavirus outbreak, Jerome Powell, the chair, stated that "if developments emerge that cause a material reassessment of our outlook, we would respond accordingly."   Yahoo Finance  WSJ

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Sustainability Investing Goes Mainstream...A Watershed Moment?

Something of significance is afoot in the investment world. Sustainability investing, which includes an evaluation of a company’s environmental and climate change impact, is going mainstream. There has been a paradigm shift from viewing sustainability as a personal or policy value to viewing it as an important consideration in assessing investment risk. Putting it in the positive, companies with strong sustainability policies will be better positioned to thrive in the future, as environmental and climate change considerations become increasingly important. Exhibit #1 is the recent announcement by BlackRock, the largest global asset manager, on a fundamental shift in its investment policies toward sustainability (see below).

  • BlackRock Getting Greener? Larry Fink, BlackRock’s C.E.O., recently announced that BlackRock would begin unwinding investments in companies that posed significant sustainability risks and would introduce new funds that avoid fossil fuels. In Fink’s own words, “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” How all this plays out for BlackRock and whether it will make a significant difference will be closely watched, but it is unquestionably a watershed time in the financial world. (New York Times) (CNBC) (Wall Street Journal)  

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