And The Band Played On

The title of this blog post comes from the 1990s HBO docudrama starring Matthew Modine as epidemiologist Don Francis.  It is based on the true story of the CDC as they first came into contact with the HIV virus in the early 1980s.  It happened to be one of my father’s favorite movies, so it became one of my favorite movies (funny how that works).  If you have a chance (and I know you do), see if you can find the movie and give it a watch.

In the movie, the mantra of the CDC when dealing with this previously unknown type of virus was simple, “What do we think? What do we know? What can we prove?”

I use this method often when analyzing markets. Let’s go through the exercise together.

• What Do We Think?
  • We think that life on the other side of Coronavirus will look different than it did before.
  • We think small businesses will not return to the same importance for the overall economy and large corporations will become even larger.   Essentially everyone will be spending money at the same four places (Grocery Store, Online/Retailer, Healthcare, Technology).
  • We think that we will be ushering in an increasingly digital workplace and world.  This had already been happening and perhaps this will just speed up the process.
  • We think the stock market is disconnected from reality since it’s not properly reflecting an economy working at roughly 50% (if the stock market reflects the economy, why aren’t stocks down 50%??).

All of these items sound pretty logical.  But the market doesn’t care what anyone thinks, including me.  It’s truly irrelevant, and even if we were lucky enough to predict exactly how the economy would look in five years, would you be able to profit from it?  “The stock market is a second level thinking mechanism (there’s that phrase again!). While most of us see the world for what it is, the stock market is always trying to see the world for what it might become.” – Cullen Roche

Based on what large institutions think, they buy companies that they believe will profit the most in the coming weeks/months/years.  Are they right?  Even they don’t know that one…

“If you’re confused or upset by the stock market action, just sit with it. Let it marinade on you. Learn to be comfortable being confused and uncomfortable. That’s way more productive than desperately searching for logic. There is no logic. Start there, and be free of the need to understand.” – Tom Canfield

• What Do We Know?
  • We know there are 152 million American workers.  We know 22 million of them lost their jobs in some capacity over the last month.  That number is likely to move above 25 million, but we won’t know until tomorrow.
  • We know that central banks and governments throughout the world have intervened in an unprecedented way to try and avoid/alleviate a recession or even a depression (full employment is one of the two Federal Reserve mandates).
  • We know March was the most volatile month for the S&P 500…ever.
  • We know that sentiment reached pessimistic levels not seen since the global financial crisis. 

• What Can We Prove?
  
  • We can’t prove much about the future, so we look to the past to show us what’s happened in previous periods similar to this one.
  • The S&P 500 has gained 15.5% in the last two weeks.  According to Ryan Detrick of LPL Research, since World War II, the S&P 500 has gained more than 12% in a two week span three different times: October 1974, August 1982, and March 2009.  One year later the S&P 500 was up 22.9%, 37.3%, and 51.7%, respectively.
  • The market remains highly bifurcated into big winners and losers.  Over the past 12 months, the largest companies (S&P 100) are up 2%, while the smallest companies (S&P 600) are down 24%.
  • On one particular day last week the Nasdaq 100 (technology sector) was up over 1% while the S&P 500 was down more than 1%…since 1985, this has NEVER happened.  – Jason Goepfert

“The only thing I have a strong conviction about right now, is that nobody should have a strong conviction about anything right now.” – Walter Deemer

There are many reasons to believe that the market will pause for a bit at this price level.   As we outlined in an email to clients at the end of March, the furthest rally for the S&P 500 we were prepared for was 2880-2900.  The intraday high price last Friday was 2879.22.  Close enough.  While we are still in the “retest the lows” camp, we must admit that if we are to deviate substantially above the 2900 level, the likelihood of a “V” recovery increases.

There is more volatility to come, so please don’t get complacent and think everything has been solved.  We still believe this will be a months/years long process for main street to get back on its feet.  But that doesn’t have to mean anything as it relates to the stock market.  Also, don’t delve down the rabbit hole of pessimism either.  It’s a convenient rocking chair, which gives you something to do for awhile, but doesn’t get you anywhere.