by: Brian Davies, CFA – Chief Investment Officer
In previous writings, we talked about what we are watching for as we move through this period. We thought it would be useful to provide you with a more detailed list of what we are looking at daily to help guide us through this historic period in the market. Before we start, it is important to remember our process is one that is data-dependent and does not rely upon gut feelings. We would like to take a moment to highlight the resources we have at Shepherd Financial Partners that provide us with the data and research to guide us. They include some of the largest financial services firms and research organizations in the industry. This group provides us with institutional level service that allows us to make prudent decisions, manage risk, and carry out our investment process. We lean on these resources to provide data behind the 7 indicators we are watching in the markets under COVID-19:
1. When the virus curve stabilizes and starts to bend
While the market has rallied over the past week, the virus is still present and growing here in the U.S. We need to see the total cases in the U.S. peak and start to decline. As of this writing, we have seen tests ramp up to the point where we have seen around 100k test per day for the last five days. It seems the countries that have “bent the curve” like China and South Korea ramped up testing and within a few weeks saw case numbers decline. Hopefully, this will be the pattern we follow in the U.S. but we have to let time play this out.
2. What is the visibility of the depths and duration of the economic data?
This is the big question that everybody is trying to figure out. We are just starting to see the depth portion of this question. Initial Unemployment claims saw a historic jump of over 3 million workers for one week. We suspect this will lead to unemployment data the reaches into the teens in the coming months. March economic data will continue to come out over the next few weeks and the expectations are for some dramatic declines in data just like the initial unemployment number from last week. Corporate earnings for Q1 start flowing out in mid-April and we will be watching for what executives have to tell us about the environment. The big question still out here is what will be the duration of the government-induced shutdown. It remains the wildcard that’s hard to gauge. Will it be April, May, June or July. We hope it is sooner rather than later but, that will be hugely dependent on the bending of the curve.
3. Large global stimulus
This has largely happened. Global central banks and governments have responded with massive fiscal and monetary stimulus with the hopes of propping up economies for the time they are shut. There could be more of this to come and again that depends on the duration question and if we can see the virus peak sometime soon.
4. Mitigation of funding and liquidity stress
Much like the point above, this seems to have largely happened but there could be more to come. The Federal Reserve Bank in the U.S has unloaded probably one of the largest monetary stimulus programs in history. Chairman Powell has stated emphatically that they are not out of ammunition. We commend the Fed for moving early and aggressively in dealing with stresses we have seen in the capital markets over the last few weeks. It has helped smooth some of the panic for the time being.
5. Deep undervaluation across asset classes
The common theme in sharp corrections like we have seen here is the deep undervaluation and price dislocation across asset classes. We saw Municipal securities and High Yield bonds sell off aggressively and to us, those asset classes represent being deeply undervalued. Stocks are close to deeply undervalued but they might have more downside if any of the prior points mentioned do not develop positively.
6. No further intensification of other tail risks
Oil falling over 50% increased stress on the markets as cash became a must-have. It was the tail risk that nobody had considered happening. Tail risks are notoriously hard to see coming. They generally appear out of the blue. With everything and everyone on edge from Covid-19, a different tail risk developing at this time would mean additional stresses that would have to be addressed. While we can’t predict what the tail will be, it is still important to be on the lookout.
7. Stocks signaling a bottom by multiple positive breadth thrust days where advancing volume is more than declining volume by 10:1
This is just one of the indicators we follow to help us think about the stock market putting in a bottom. Positive breadth thrusts are usually one of the last indicators to turn. As of this writing, we have had one recent positive breadth thrust and, while that’s a start, it is still very early. History tells us these corrections are rarely V-shaped in movement. They can sell off, then rally and then in a few weeks or months, test those lows. So, while most of the indicators we follow have signaled a bottom was close, history tells us to be patient as we move forward.
We understand that this period of time has brought uncertainty into all of our lives. We want you to know that we are always here to discuss your goals and changing circumstances as we confront the changes that COVID-19 has brought into our lives. Most of your plans and goals are measured in years and decades, not weeks and months. If you are at all concerned about what this environment means for your financial plan and goals, please lean on us and reach out to the Shepherd Financial Partners team for a discussion. We are actively working to manage through this for you. We hope you find this communication helpful.
Until we talk again, stay safe and be healthy.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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