Retest The March Low Or Not

The economic and equity market environment investors find themselves operating in today are different and more challenging than any environment they have likely faced in their lifetime. The steep market contraction from the February high was swift, i.e., declining 33.9% over a short 22 trading days, the fastest on record. With a nearly global economic shutdown due to mandatory stay at home orders, the economic growth rate, or should I write, contraction, is turning out to be severe. The CBO's estimate of U.S. second quarter GDP is for a contraction of nearly 40% at an annual rate. Over 26 million jobs have been lost in five short weeks, wiping out the job gains that were generated following the financial crisis of 2008/2009. So in the face of this poor economic data, will the equity market retest the March 23 low?

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Investor Bullish Sentiment Weakening

Until today I had been surprised individual investor sentiment was holding up at an elevated level. However, with the AAII Sentiment Survey release this morning, for the week ending 4/22/2020, bullish sentiment fell 10 percentage points to 24.9%. This is the lowest bullishness reading since October 10, 2020 when bullish sentiment was reported at 20.3%. A majority of the formally bullish respondents flipped to the bearish category this week, where it rose 7.3 percentage points to 50%.%.

The sentiment readings are contrarian ones and looking at them on their own, a further weakening would be one positive metric for higher equity prices.

Downside Earnings Revisions Tend To Peak Near Market Bottoms

It is not surprising company earnings revisions have been mostly downside revisions with most of the country/consumers sitting at home. What is noteworthy though is the upside to downside earnings revision ratio tends to bottom near equity market bottoms. During the 2008/2009 financial crisis, the revision ratio bottomed in late February and the S&P 500 Index bottomed a little over two months later. As the below chart shows, the current upside/downside ratio is lower than the ratio reached at the bottom of the financial crisis in 2008/2009.

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The Current Market Like 1987 Or 2008/2009?

Investors and the market are entering peak earnings season and with futures down this morning, it seems investors may be facing a buy the rumor sell the news type of market. The crash in oil prices, with NYMEX crude down 35% to $11.77 per barrel, is adding to the negative market sentiment. Up until this peak earnings period for the first quarter, the S&P 500 Index rose over 28% off the March 23 low as of Friday's (4/17/2020) close. The speed of the market decline from February and the subsequent speed of the move higher seems at odds with the business environment facing companies. As is often said, the market is not the economy. Investors are now faced with answering the question of where the market is headed from here.

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Equity Markets Defy Emotions

From February 19 to March 23 the S&P 500 Index went from trading at a record high to being down 30.75% for the year, all in the span of 23 trading days. The speed of the decline caught most investors by surprise. In the fifteen trading days since the March 23 low though, the Index is up 27.2% and regained 608 of the 1,148 points lost in the contraction. In spite of the strong recovery, a majority of S&P 500 stocks still trade far below their 50 day and 150 day moving averages. Only 31% of S&P 500 stocks are trading above their 50 day moving average and 21% are trading above their 150 day moving average.

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Retest The Low Or Onto New Highs?

Of course March 23 is not even a month in the rear-view mirror, but the S&P 500 Index is up over 23% since the low on that date. Some have commented the market will retest that market low before achieving new highs while others say the Fed's intervention minimizes the likelihood of a retest. As time moves further past the March 23 day, it seems "the no retest" chorus is sounding more probable. Because I have a bit of a contrarian tilt in my viewpoints, maybe the no retest sound bite means just the opposite?

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Spring 2020 Investor Letter: The Bears Woke Up

The first quarter was an unprecedented one as the S&P 500 Index decline was the fastest 30%+ sell-off ever. The market ultimately fell 33.9% from February 19 to its low on March 23, just 23 trading days. This occurred on the back of a strong 2019 where the S&P 500 Index was up 31.5% for the year. A strong start was underway for 2020 with the S&P 500 Index up 5.1% through February 19. The COVID-19 virus pandemic puts individuals and investors in an environment that was unimaginable just a few weeks ago.

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NFIB Survey: Small Business Survival At Risk

Small businesses (less than 500 employees) account for around 50% of total private payrolls. The broad virus initiated and widely mandated "stay at home" orders across most states are having an extreme negative impact on small businesses, all business for that matter. In today's NFIB Small Business Optimism release, the Optimism Index fell 8.1 points to 96.4, the largest decline in the survey's history. It should be noted most of the survey responses were obtained in the first half of March.

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Individual Investor Bullish Sentiment Surprisingly Not So Low

One factor we track on a periodic basis falls into the investor sentiment category. There are a number of sentiment measures one can evaluate on the institutional and individual investor level. The one that is weighing on our minds currently is the fact the individual investor bullish sentiment level has not reached a level one would expect in a market like the recent one. When the S&P 500 Index is down 33.9% in 23 trading days, I would expect individual investors to become extremely bearish on equities, at least that has been the case historically.

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Market Volatility May Create Opportunity

My blogging has been rather light the past few weeks as most of my effort has been focused on our clients' and reaching out to them during these uncertain times. I mostly write blog articles during the evenings and on the weekends and my wife has been hearing me say, "I want to get a blog post done."  So much to write about, but so much going on. With Ohio continuing under a 'stay at home' order, I am writing today.

The government's mandated shutdown that is in place in an effort to slow the spread of the COVID-19 virus has created an unusual economic and market environment.  Our firm's leadership, marketing, technology and human resource staff, have done yeoman's work on assisting in our client communication efforts. Our dedicated website landing page on the COVID-19 topic is just a small example of everyone's effort.

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One-Stop COVID-19 Resource Center

Blogging has been light given the fluid and volatile market environment resulting from the ongoing COVID-19 virus situation. Our firm continues to reach out to clients to provide insight and information they need during this unusual time. An outcome of our communication with clients and HORAN's broad reach across health care, investments, insurance and business in general, the firm has established a dedicated COVID-19 Resource web page with the assistance of our marketing group. Some of the site's dedicated page provides information for:

• HR professionals, e.g., answers to FMLA questions,
• business information, e.g., link to the SBA Disaster Assistance Loan website,
• answers to retirement planning questions and periodic market and financial updates, and much more.

Check out the site. If we can provide answers to any other question, do not hesitate to let us know.

Are We There Yet?

Some are equating the current market decline to the equity market decline that occurred in October 1987. Urban Carmel, who writes at The Fat Pitch highlighted in commentary on Twitter, the market's action in 1987:

• "the S&P 500 Index fell 20% in one day, rose 15% the next 2 days, then returned to the low the following week."

• "then rose 15% again and retested the original low 6 weeks later,"

• "and finally the S&P 500 Index was up 25% a year later and back at prior highs 2 years later."

So what does that look like compared to today's market and has it arrived at a bottom? 

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An Extreme Level Of Equity Market Fear

Can fear measures get to a level more extreme than today? They did during the great financial crisis (GFC), but we do not think the current environment is like the 2008/2009 market period. Near the equity market open this morning trading was halted for 15 minutes as the equity market circuit breaker was triggered with a 7% market decline. Then investors had to contend with a near 25% drop in oil prices due to Saudi Arabia and Russia disagreeing on oil production levels. For consumers though, lower oil prices should translate to lower gas prices at the pump, a bit of a silver lining.

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Coronavirus: Panic Leads To Pessimism

Don't get on an airplane, don't get on a train, don't get on a cruise ship, stock up on food and necessities, but don't go to public places where there might be crowds. The world is ending. The reaction to the coronavirus, SARS-CoV-2, outbreak appears to have moved into a panic over the situation. So one might ask why an investment person like myself is writing about this outbreak. The reason is my belief this is an unnecessary overreaction that is impacting the investment portfolio of institutions and individuals. The near cartoon places my thoughts in the proper perspective though.

I have written several recent posts on the extreme level of fearful investor sentiment, here and here. Reviewing the economic data to date suggests an environment where investors should be anything be fearful of the future. Jeff Miller, Ph.D. writes a weekly article that highlights recent economic data and expectations for the week ahead. In this week's article, Weighing the Week Ahead: Why it is Crucial to Use the Right Time Frame, he discusses some of the recent economic data and more. So why is fear driving the narrative. One author who seems to have an uncanny ability to put thoughts succinctly into perspective is Morgan Housel. His article from 2017, The Seduction of Pessimism, is a worthwhile read given the narrative around the recent virus outbreak. One comment that jumped out to me in his article is,

"We don’t just respond faster to pessimism. We coddle it for longer than is necessary. Optimism demands facts and is ditched at the first sign of trouble. Pessimism can be grown from a crazy thought and clutched indefinitely."

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Broadening Fear Means Increasing Potential For V-Shape Market Recovery

A widening fear level across many sentiment measures increases the likelihood of a strong market bounce. I will not rehash the panic narrative I wrote about last weekend, but sentiment measures are becoming increasingly bearish.

• NAAIM Exposure Index: The NAAIM Exposure Index was reported at 29.03% this week, a 36 percentage point decline from the week earlier. The NAAIM Exposure Index consists of a weekly survey of NAAIM member firms who are active money managers and provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesday. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers as a group. Institutional money managers have equity allocations at a level lower than the December 2018 market decline and near levels reached in the weak market of 2015/2016.

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Market Decline Driven By A Panic Narrative

If there is one factor most disappointing about the coronavirus (COVID-19) outbreak, it is the panic narrative that seems to have overtaken a more rational narrative. This panic narrative is certainly contributing to the negative equity market reaction. In a tongue and cheek Saturday MarketWatch comment by Tom Lee, founder of Fundstrat Global Advisors, he notes one of the factors impacting the market may be investor concern of, "A meteor or alien invasion to end global existence has been spotted but its arrival is unknown (or a virus pandemic.)"

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Equity Market Sentiment Moving To An 'Extreme Fear' Level

The coronavirus, Covid-19, has triggered the recent decline in the equity market, specifically the S&P 500 Index. The Index is down 8.3% from its February 18 high with six percentage points of the decline occurring in the last two days. In spite of the recent weakness, the S&P 500 Index remains up 17% since the beginning of 2018. Within the S&P 500 Index though, more than 125 stocks are down more the 25% from their 52-week high, potentially providing some individual stock opportunities for investors.

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Current Market Similar To 1950's & 1980's Bull Market

I have noted in earlier posts beginning in 2016 (here and here) that the current equity market track resembles the bull market of the 1950's and 1980's. Those earlier articles noted policy similarities currently in place similar to policies pursed in those earlier decades, like tax cuts, infrastructure spending and more. As the below chart shows, the bull market that began in 2013 is tracking closely to that of the 1980's and projected to meet the 1950's & 1980's markets in a year or so.

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Simply Too Much Brick And Mortar Retail Space

As I often note when commenting about consumer related data, the consumer is important due to the fact they account for 70% of economic activity in the U.S. With the current economic cycle the longest on record, the consumer continues to show strength and remain in good financial shape. And given a strong consumer it may seem surprising that retail bankruptcies continue at a pretty high pace. Earlier this week Pier 1 Imports (PIRRQ) filed for bankruptcy and this will likely not be the last retailer to face financial headwinds. The following link from CB Insights Research Briefs details 81 retail bankruptcies since 2015.

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Positive Consumer And Business Sentiment Creating A Tailwind For Future Economic Activity

One area that remains favorable is the confidence of the consumer and small business owner. In this week's release of the NFIB small business Optimism Index, optimism rose 1.6 points to 104.3. The survey notes six of the ten components rose, two were unchanged and only two declined. Small business owners' sales and earnings expectations improved significantly, sales up seven points and earnings trends up five points. With respect to the consumer, Friday's University of Michigan Consumer Sentiment Index rose 1.1 points to 100.9. The report noted this level is near the expansion peak reading of 101.4 reached in March 2018. Also important, is the "Expectations Index, the main gauge of future economic conditions, rose to 92.6, also its second highest level in this long expansion."

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