The Government has been forced to act quickly and in a significant way. The Fed is already supporting the market in a much larger manner than in previous recessions. As we wait for the fiscal policy to be announced by the Senate please keep in mind that these are politicians, so they are going to fight back and forth on the stimulus fine print. But make no mistake, both sides want to get something out to the public sooner rather than later. While the Senate is close to a deal, it is an election year, so mud will be slung. But, have faith that a deal should be made at some point this week.
The Fed has brought out their “bazooka” over the last two weeks which included the following:
- Slashing the Federal Funds rate to 0.00%
- Restarting their quantitative easing programs at massive levels, including the purchase of mortgage-backed securities (MBS).
- Injection $500 billion into the overnight repo market
On top of these actions they have also started up their “Alphabet Soup” programs, these are facilities to assist in the stabilization of commercial paper, money markets, and primary dealer credit. These programs assist in the daily liquidity throughout the economy, which was the major issue with the extended length of the 2008 Financial Crisis.
We learned a lot in the financial crisis of 2008 and today we should be thankful for those lessons since it laid the groundwork for the Fed to act much more expeditiously. What took quarters for the Fed to develop and implement back in 2008 and 2009, they have acted in less than a month at a much larger size.
Along with the Fed, we are looking at 4 major parts to the fiscal policy that the Senate is working on, these include:
- Aid to small business- this program will run for all Q2 and allow business with under 500 employees to borrow money under the government’s loan forgiveness program. The government is backstopping the revenues of these companies so that they can continue to pay bills and employees.
- Tax Refunds– the plan is expected to inject $500 billion of cash into the hands of citizens through a special tax payment, such as we had in 2008. There are a few sticking points here that need to be ironed out that involve lower-income individuals, but once the plan is set, we should look for a very positive economic response. Going back to the 2ndquarter of 2008 when this form of stimulus was used, it was the only time in 2008 that the economy showed consumption and GDP growth.
- Guaranteed Corporate Loans- simple loans provided to larger corporations to provide liquidity for day to day operations.
- Corporate Aid- this is the major sticking point between the two parties in the senate as numerous companies have reached out to the government for direct aid. Most notably is Boeing which has come under pressure due to the Super Max issues and now the weakness in the airline industry. Both parties are trying to come to an agreement to allow the government to take ownership of corporations in order to help with their near-term operations and then benefit from their future rebound. Keep in mind that one of the greatest investments ever made by the government was when they took a stake in AIG back in the fall of 2008 and later sold at a hefty profit.
We have learned in our investment careers that “you never want to fight the Fed.” Risk assets respond very favorably to quantitative easing once investors realize that the worst-case scenario is unlikely. Fiscal policy such as tax cuts and subsidized checks have also benefited stock prices historically. The fiscal stimulus package that is yet to be unveiled will be substantial. The speed by which the Fed and the Administration have responded should be applauded and prove to be very beneficial to investors.
Bear Market/Bull Market Historic Performance
Understanding the characteristics of both Bear and Bull markets is important. As you can see in the charts below, we are “in the neighborhood” where bear markets have historically bottomed.
On average the negative performance during a Bear market lasts 20 months and generates an average loss of around 40.00% in the S&P 500. On the other hand, Bull markets historically last three times as long as Bear markets and provide average returns near 180% over their duration. The one outlier of the current bear market is the speed in which it happened. This leads us to believe that the issues currently controlling the market, will pass much quicker than most expect.
Bear Markets Since 1929
S&P Bear Market Periods
|Date||Price||Date||Price||Length in Months||Percent Loss|
Bull Markets Since 1929
S&P Bull Market Periods
|Date||Price||Date||Price||Length in Months||Percent Gain|
We have developed a checklist of items that we are looking for as far as a major market low is concerned. These items include the following:
- Extreme oversold condition- we are about as oversold as we have ever been.
- Apocalyptic Sentiment– this data is lagging but we assume that the numbers we see this week on Wednesday will confirm that the sentiment has finally reached the necessary levels.
- Falling stock correlations– we need to see more and more stocks show better performance vs the overall market on weaker days. There were some faint positives last week, so it will be important to expand on this performance this week.
- Contraction in the number of stocks making new lows– we had almost a record day last Monday on the number of new lows in the market, just like with correlations, we need less and less participation to the downside on new lows in individual names. This is also very important on any retest of the lows.
- Strong breadth– Breadth analyzes the number of stocks advancing to those that are declining. When breadth is positive it shows that market bulls are in control. This has been a big missing piece of this market for the last month. We need to see excessive breadth or number of stocks that are up on the day to mark the low. Christmas Eve marked the low for the market in 2018, on the 26th we saw one of the strongest breadth days on record as more than 3,000 names on the NYSE traded to the positive side…. we need to see that participation again.
- Risk seeking leadership- we have begun to see some improvement in this reading the last few days as the higher beta and small-cap names have outperformed. We need the risk names to lead. Interesting two of the better breadth days we have had in the past month, utilities have been the market leaders on those days, we are not going to make a bottom with utilities being leaders.
- Positive credit market divergence– this has been tough to pin down the last two weeks as the credit markets have been all over the place. Just look at the 10-year yield which has gone from 1.1% to 0.39% to 1.25% to 0.93% since the beginning of March. The operations from the Fed will help but we need to see credit volatility contract.
Steeper yield curve– this is working but there is more work to do before we are more secure in the call. The spread between the 2 yr. and the 10 yr. need to continue to expand as they have over the last week.
Chief Investment Officer
Please feel free to reach out to us with any questions or concerns that you might have.
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