(Please enjoy the latest investment insights from the Reitmeister Total Return newsletter).
Yes, the rate of coronavirus cases has dropped. And soon too will the # of daily deaths. Certainly we are all thankful for that bit of good news.
Now we turn our attention to re-opening the economy. I believe the optimism held for that event may be starting to deflate as more investors truly contemplate how difficult that will be and why that probably spells lower stock prices ahead.
That will be our focus today.
This CNBC headline kind of says it all as it recounts the flurry of negative economic reports today that soured the mood in a hurry. For as bad as the S&P drop was today the more Risk On small caps in the Russell 2000 were down twice as much. Here is a roll call of just today’s bad news:
-8.7% for Retail Sales. Biggest drop ever.
-5.4% for Industrial Production…biggest decline since 1946.
-78.2 reading for Empire State Manufacturing when -35 was expected. And yes, that is obviously an all time low.
Plus over the past couple days we have gotten a host of bank earnings which are downright terrible. Note that banks work with all industries and thus are a pretty good bellwether of the entire economy. So when we see the magnitude of the current decline in profits when we are only talking about 1 bad month of March in the mix for Q1…imagine how much worse it will be when we evaluate a full quarter of this hot mess for Q2.
This explains why the main financials ETF (IYF) was down -4.56% today. And why the regional banking ETF (KRE) was down a whopping -6.74% and now down nearly 50% from its peak.
And this list of recent bad news could be endless with all the other negative shocks to the system. Like how the Small Business Association is almost tapped out on loans. Yes, the government will likely approve more loans. But just think about how bad it has to be to already hand out $296 billion in loans in such a short period of time.
Or how about how the majority of publishers say advertisers have canceled or paused campaigns. Think of all the ripple effects of that as it means businesses are running to cut costs as fast as possible (typically employees and marketing budgets get slashed first and then all hosts of other costs come next.) This greatly lowers spending…which hampers the economy…and yes should harm stock prices.
When you have this for a backdrop you understand how decimated business really are. Plus the consensus calls for another 6 million jobs to be announced lost tomorrow on top of the 16 million cut already. That puts the unemployment rate at about 18% and counting.
Now that gives a better picture of how low we have sunk in just the past month and a half. Now add on top how much worse it will be by May when we start to reopen the economy. AND NOW, with that miserable perspective more firmly in place, let’s consider what it truly means to reopen the economy and why that won’t go as well as some had hoped.
Many experts have weighed on this one topic of difficulty of reopening the economy. Here are a couple to consider:
Dr. Gabriel Leung who is an infectious disease epidemiologist. In his recent NY Times article he contemplated what it would take to open society back up.
Dr. Fauci, leading health advisor to the government, We’re Not There Yet, on key steps to reopen the economy.
But let me save you the bother of reading these pieces. Let’s just use some good old fashioned common sense to appreciate the scope of the problem.
Imagine that the Government started opening the economy May 1st. And yes, they could do it by region…age group…industry…whatever. Let’s assume that they did it the smartest possible way (which is a stretch when we consider how most of us don’t trust the government no matter who is in charge).
Now I want you to think about you and your group of friends/family as a research group. What % of these people you know will FREELY be doing any of the following in the next 3 months:
- Get on a plane, train or bus
- Stay at a hotel
- Visit a casino
- Go to the movies
- Dine at restaurant
- Shop in person at stores (as often as you used to)
- And just about any other activity that means interacting with MANY people
Yes, there are many who are willing to do this now. But it’s not about the % that are willing to do it. Unfortunately, it is about the % who won’t.
(read that part again so it sinks in…then continue).
Even just a 10% decline in any of these things would make most of these businesses unprofitable. More likely these companies will be running at 20-50% off peak capacity for the foreseeable future, which is not profitable, which will lead to even more cost cutting, which will lead to even more job loss…which, you guessed it, leads to greater economic decline and lower stock prices (or at least it should).
So again…please review that bulleted list above. And now add in the idea that you might be willing to do some of those activities…but will you do them at the same frequency you did in the past???
Yes, you and I will go restaurants in coming months. But you and I know it will be a lot less often to keep the risk of exposure down to a reasonable level.
Again, just a 10% decline in these areas is enough to kick a recession into overdrive…and yes, at this stage, we do need to consider a depression (4 quarters of negative economic activity year over year…while a recession is just 2 quarters).
This is why I shared some notes on Monday from some pretty heady folks who see a long, hard ahead for us:
“…the Fed’s Neel Kashkari alluded to in this recent article that recover could be a long, hard road. And famed economist Robert Schiller weighed in recently about how the pandemic of fear comes with higher unemployment that could result in a longer term depression.”
Again, it is “possible” that bear market bottom is in and new bull market is emerging. It is just not highly probable as explored in depth with my Monday morning commentary: Contemplating the Bull Market Case.
So given all the economic damage becoming more evident. And the usual vicious cycle further south that follows leading to more job loss and lower spending, then I have to cling to my bear market premise and stay on board with the hedge at this time.
Just one more thought. There never really has been a V shaped bottom this quickly on a bear market. 1987 was close. But that was about some financial crisis in Asia that had very little real ramifications for the US economy. And that still took nearly 3 months retesting and retesting the bottom before a lasting recovery ensued.
This Coronavirus is much more far reaching catastrophe than 1987.. Because we are truly talking about the entire world economy…not just the US. And it is still a very present danger with fairly high odds of lingering in our lives for quite some time to come.
So to me that says to expect that the March low is the end of the bear market is unprecedented and highly unlikely. And to assume lower stock prices are on the way is more a matter of when…not if. Just have to wait for this bear market rally to run out of steam. And some signs this past week, like the very Risk Off nature of today’s action, has me believing that time may be soon at hand.
Our portfolio was built for a day like today. That is when the market sold off after an extended run higher. And with it investors shifted back to some of the more conservative stock names.
Obviously all 4 of our inverse ETFs were higher on the session with (ticker removed) leading the pack at +4.2%. The much more interesting aspect was that all 6 of our stocks outperformed the S&P. In fact, 2 were in positive territory +2.3% gain for (ticker removed) and +1.7% for (ticker removed).
That is how we ended up generating a welcome +1.13% gain today while the market sank. Note that Monday was quite similar with +1.27% gain on the day when the S&P only fell -1.01%.
Yes, there were some up days for the overall market like Tuesday. But even then we still squeezed out a modest gain.
Net-net this was a good week to stay in the hedge. So imagine how much better it will be when investors likely come to their senses that this bear market rally is played out and time for an extended run lower.
Here are some other insights to share on our individual positions:
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What to Do Next?
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I know its crazy out there. And I am trying my best to help investors make sense and profit from this truly unique investment landscape.
The place to find that help is my newsletter service, the Reitmeister Total Return, where I share more frequent commentaries on the market outlook, trading strategy, and yes, a portfolio of hand selected stocks and ETFs to produce profits whether we have a bull…a bear…or anywhere in between.
Just click the link below to see 6 stocks and 4 inverse ETFs in the portfolio now, and all the future trades as we find bottom on this bear and the new bull emerges.
SPY shares rose $1.63 (+0.59%) in premarket trading Thursday. Year-to-date, SPY has declined -12.76%, versus a -12.76% rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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