By Jeff Miller:
The economic calendar includes several important publications, but few reflect the effects of COVID-19. Everyone knows that the economic news is dismal. How gloomy does not seem to matter.
Investors want to know if we have seen the bottom of stock prices. They ask, “When are people going back to work?” Is it time to start buying stocks? If yes, which ones? Serious market watchers discuss letters representing the future economic route: V, U, L or W. (I wanted to create a memorable acronym from these letters and I asked Ms. OldProf for help. She admitted that help from Vanna would be needed).
These are all good questions that attract a lot of attention and many answers. The problem?
We are faced with many good questions, but only wrong answers.
In my last episode of WTWA, I tried to demonstrate the need to understand the complex patterns that underlie key medical, economic and government decisions. There was a lot of discussion on each of the key themes but little effort to show the relationships. The new issue of Barron’s had an article on everyone! It illustrates the need for a framework.
I always start my personal review of the week by looking at a large graph. This week, I present Jill Mislinski’s version, an excellent combination of the most important information.
The market gained 12.1% over the week. The trading range during the week was 9.5%, or 13.3% if we include the closing price on Friday April 3 in the calculation. You can monitor volatility, implied volatility and historical comparisons in my weekly indicator overview in the Quant Quant below.
For an interesting long-term overview of daily trading ranges, here is another of the many excellent graphics from Jill’s weekly update.
Each week I break things down into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expected. I avoid using my personal preferences to assess news – and you should too!
The New Deal Democrat high frequency indicators have always been a valuable part of my economic review. Finally, we will focus on an economic shift. This source will be useful for this purpose, as it has been for identifying potential weaknesses before the recession. The short, coincident indicators remain terrible. Long leading indicators continue to reflect aggressive political responses. Here is a key part of NDD’s own conclusion:
“The long-term forecasts, supported by interest rates and the intervention of the Fed’s money supply, remain just above neutrality. As I said last week, public policy decisions taken at the Washington summit will determine the shape of the economic response to the pandemic, including whether a serious short-term disruption becomes a credit and liquidity crisis, and whether a deflationary wage spiral (which is the subject of a other post) begins to take root. “
Until we have more relevant data, I’m just going to touch on the highlights and provide an interpretation. Reports prior to COVID-19 continued to show strength. Job vacancies remained close to the peaks. Inflation data was weak for core measures (0.1% for the CPI) and negative for stocks. This was the result of lower energy prices, making low gas prices another good news for those who drive!
Everything else dropped, often missing even reduced expectations. NFIB’s small business optimism fell to 96.4 in March from 104.5 in February.
The decline in rail traffic is the largest since the Great Recession. (Steven Hansen, GEI).
Almost a third of US tenants did not pay rent in April (NYT).
Over a quarter of the US economy has become inactive. (WSJ).
Initial jobless claims reached 6.6 million, down from 6.9 million the previous week but less than the 5 million expected. With the rapid shutdown of much of the economy, the surge in claims is not really a surprise. We simply have no background for assessing large numbers or how long the surge could last. Most layoffs are described as temporary and many are covered by increased unemployment insurance under the CARES law.
Mortgage applications fell 17.9% from the previous week and are now following the weakest years in recent history.
Michigan consumer sentiment dropped to 71.0. Jill Mislinski notes that this is the lowest reading since 2011 and the largest monthly decline in history.
The pandemic has inspired many acts of generosity, but it also brings out the worst in some.
People Attract Instacart Buyers With Big Tips – Then Change Them To Zero [Seems like this could be fixed pretty easily, and it should be.]
Authorities warn Alex Jones to end Hawking coronavirus scams
Hospitals say authorities seize masks and other coronavirus supplies without a word [One of many such stories I saw this week, as local administrators scramble for resources while seeing the peak needs approaching.]
We would all like to know the direction of the market in advance. Good luck with that! The second best plans what to look for and how to react.
The economic calendar will include some important reports covering at least part of the time after the spread of the COVID-19 virus. We will see some effect in most reports and a full effect in mortgage applications, initial unemployment applications and leading indicators. I will continue to manage the calendar, but (as I have been emphasizing for weeks), we must remain aware of the data collection dates rather than the publication dates.
As you can see from the expected results, economists providing estimates “go low”. So far, the assumptions have not been weak enough. Since everyone knows that a large part of the US economy is inactive, the focus has been on the likely length of the shutdown. (The Capital Spectator)
It’s also the start of the profit season, normally a major topic for us. Conference calls will be particularly important. Investors will turn to business leaders to provide assumptions about the impact of current events on their current and future activities.
And of course, we will have many briefings, tweets and political comments from all parties.
Briefing.com has a good US economic calendar for the week. Here are the main American versions.
The economic calendar includes several important releases, but only partially reflects the effects of COVID-19. Everyone knows that the economic news is dismal. How gloomy does not seem to matter.
Investors have quite a different list of questions:
- Have we seen the bottom of stock prices?
- When are we going to restart the economy?
- Is it time to start buying stocks?
- If yes, which ones?
- Will the future economic trajectory look like one of these letters: V, U, L or W.
These are all good questions that get a lot of attention. Many answers are proposed. The problem? None of the answers are good!
We are faced with many good questions, but only wrong answers.
The current challenge for investors is to find some nuggets of valuable information. To do this, we must structure our thinking.
Last week, I described the importance of models for current investment decisions. The work is complicated and has serious limits. That said, it has already produced important results.
- Policymakers have a better idea of how the virus spreads and the steps needed to slow it down. Would a government have taken such dramatic action without a thorough analysis of the wrong data?
- Medical staff and managers can better anticipate future service requests.
- Estimates of economic impact justified policy responses that would have been unthinkable without solid evidence.
The framework I built remains important, but it does not lend itself to my WTWA publications. There are hundreds of articles and news on every aspect of the problem. Many of them are good. In my quest for semi-retirement to be as useful as possible, I combine two approaches.
- I will maintain the basic structure of the model and a long list of good sources in a separate area. (Please be patient with this work in progress. If I am too stressed, Ms. OldProf will try to reduce my working hours!)
- In the WTWA articles, I will highlight the most important developments I have found this week.
Most of what I read is still on the cutting room floor, but this process will make more information available to those interested in further study.
Remember the basic structure of the models – pandemic, economy, corporate earnings, stock prices. There is no safe way to jump in the chain. Everyone will receive a link from the main page.
And finally, here is a friendlier description of the problem, Loose Lips: The Psychology of Rumor During the Crisis. Here are some current examples.
“With the spread of the virus came the rampant spread of rumors from many sources: news media, social media, neighbors and websites. Some of them are harmless. Perhaps you have read dolphins swimming in the canals of Venice, occupying the space previously inhabited by boats. Some are desirable, such as those which indicate that a vaccine will be available in the coming months or that gargling with salt water will prevent the virus from entering the Others are divisive, such as those who claim that China deliberately manufactured the virus as a biological weapon. I suppose you have heard at least one of these rumors, none of which is true.
This is an interesting and readable article. I particularly liked the comparisons of the Second World War.
Taylor’s analysis appears to be drawn from work done by Allport, Knapp and others during the Second World War. After analyzing 1,100 war rumors, Allport and Postman created the “basic rumor formula”: r = I × A, expressing the idea that rumor is a direct function of importance and ambiguity. Faced with very important but very ambiguous situations, rumor will be omnipresent.
The formula helps us understand why we adopt information that has no declared margin of error. “
Now let’s move on to the current update on the key segments of the model.
Scientific developments highlight apparent successes.
And the impending challenges.
Economic news includes the problem with small businesses.
Healthcare law supposed to help save small businesses, but independent restaurants remain in dire straits
And Small businesses wait for money as disaster loan program unfolds
Is it possible to suspend the economy for a few months? Timothy Taylor explores both the attractiveness of politics and some long-term consequences.
Policy choices focus on when the economy may reopen and the sacrifices of privacy that may be necessary.
Antibody testing and retests? (Barron’s)
US far to reopen economy, experts say
Yet people expect a quicker end. (Stat).
Stock prices could take a big step.
INDUSTRY ANALYSTS PREDICT THAT S&P 500 WILL CLOSE OVER 3200 IN THE NEXT 12 MONTHS
The stock market has rebounded. Why it’s time for another drop.
Eddy Elfenbein on “provisional news that social isolation policies have an impact … Markets are celebrating, and that may be premature”.
Paul Schatz covers his bets with 3 scenarios for the Stock Exchange in Q2.
I have a rule for my investment clients. First think about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the instant indicator.
For a description of these sources, click here.
Long term and short term technical indicators continue at the worst reading and are not about to improve. the C-Score has improved slightly. He will now have a new goal. This warned us of the recession last May, but coincident confirming indicators never pushed us beyond the level of tipping. The conditions are clear enough for me to wait for an “official” recession call from the NBER which will set the start date later this year. It will not be March because the March data does not really meet the dating criteria. There has to be a significant and prolonged downturn in the economy. It will certainly be a significant decline, but prolonged will be a matter of judgment. We could also escape the traditional two negative quarters, say some economists. None of this really matters to us. We will reset our thinking and let the C-Score help us predict the next low cycle.
I treat term gains and the resulting measurements are not meaningful until we get more clarity. The data in the table represent the best assumptions from the best sources.
I continue my rating of “Neutral” in the overall outlook for long-term investors because I would not be a buyer or seller at this point.
Bob Dieli: Analysis of the economic cycle via the “C Score”.
Brian Gilmartin: All in all, for the whole market as well as for many individual businesses.
Doug Short and Jill Mislinski: regular update of a series of indicators.
Georg Vrba: business cycle indicator and market synchronization tools. The latest update to Georg’s business cycle index pointed to the recession, but the full impact of the indicator will not be visible until June.
Do low levels of investor equity distribution lead to higher returns? See the analysis of Of Dollars and Data for a “maybe” useful. But then check her On the purchase of shares after large gatherings.
Investors must understand and accept volatility. They should join my joy in a well-documented list of concerns. While the concerns are resolved or even resolved, the investor who looks beyond the obvious can collect generously.
If I had to choose a single article that investors would read this week, it would be that of my friend Rob Martorana How to read financial news: Coronavirus, confirmation bias and political bias. It clearly explains the links between emotions and biases and our decisions. He underlines the current relevance, writing “Now more than ever, we must read the news with a clear eye on our emotions and our prejudices …”
It provides an excellent framework, discussing each step in turn.
One problem with finding bias in stories is that people cling to their favorites and call opposing views “false”. Rob draws on the work of Vanessa Otero who understands this useful table. (Here is a larger and interactive version).
And finally, on many other important points, he makes a personal observation which is confirmed by many current polls:
“I have read all kinds of news, from conservative to liberal, and everything in between. I have noticed that clients react to the coronavirus in different ways, depending on their worldviews and political opinions. , I have found that politically conservative customers see coronavirus one way, and politically liberal customers see coronavirus another way. “
Helping clients this way is an important part of providing sound investment advice.
Here are some ideas to consider, but don’t skip my recommended scanning process!
Chuck Carnevale discusses his current shopping list for quality stocks. Like many of us, he suspects more volatility ahead and hopes it will be a short time. He defines this as perhaps less than a year. Read the full post for his ideas and of course watch the informative video. He sees this as a time of preparation and research. I agree.
“So, what should an investor do? For me personally, I act like Santa Claus – I make my list and double check it. My rational mind says that quality is paramount in this environment , and in this regard money is king. Therefore, I actively research the highest quality companies I can identify and find. Then I build high quality stock lists that match various investment objectives. For example, I have drawn up a dividend list of growth stocks as well as a list of pure growth stocks which I think will not only prevail during this crisis, but may even thrive. “
Too late to buy Zoom Video (ZM). Beth Kindig discusses the company’s impressive track record after the IPO as well as the recent surge in prices. She believes he will continue to outperform the market but remains cautious about the current high valuation. Read the entire post for its nuanced conclusion. What makes the Zoom product more attractive than its competitors? She writes as follows:
“There are a few key product features that help Zoom Video stand out from the competition. These features may seem simple, but they are actually quite difficult to integrate into a product.
“Viral mechanics” refers to the spread of growth between users as a mechanism built into the product. Zoom has viral mechanics due to the decrease in friction.
Competitors such as Cisco (NASDAQ: CSCO) Webex, Microsoft Skype, and LogMeIn (NASDAQ: LOGM) require large user accounts, downloaded applications and software, which restricts the one-to-many model. Technically, Google Hangouts also wants you to be signed in to a Gmail account. This does not work for corporate teams on Microsoft Outlook. Business teams are also becoming increasingly mobile, switching devices and having to join meetings very quickly.
Again, joining a video conference without downloading an application or software may seem minor, but it is actually a driver of adoption and virality. This micro-improvement has an effect on the speed at which Zoom conference URLs are shared among multiple users. “
Blue Harbinger suggests that some high-yield mREITs and bond CEFs have significant support from the Fed. As a result, they are more attractive than other high-yielding products. He explains the reasons, but it is wise to go slowly and carefully with high yield products.
Colorado Wealth Management partners with Mortgage REIT death rumors have been greatly exaggerated.
I made it easier for readers to join my “Great Reset” project on my site. I hope you will try it. There are no fees. We will not share your email. Most importantly, I hope we can learn from each other.
Ben Carlson describes the decline in small cap stocks and the weaker rebounds. He then considers performance in the wake of a bear market, warning that each case is different.
Some analysts are already discussing how the big reset can help start the big rotation. Scott Welch, Investment Director – Model Portfolios at WisdomTree, begins by mentioning the market valuations of small and mid-cap stocks. How it works depends on the economic cycle. Here is an example.
The full article contains additional ideas on what the change in business cycle could bring.
“We understand how difficult current market conditions are and how difficult it can be to overcome volatility, stress and anxiety and take a longer-term perspective on portfolio allocation. But , as we suggested earlier, we believe it will end and the market will recover. We don’t know when, and we accept that we still have a long way to go. But the current crisis will end and the market will recover.
In anticipation of this period, we believe that this is now an excellent opportunity to reflect and plan how to fall back on the markets. History suggests that there are certain investment styles, strategies and risk factors that will lead the way once the recovery begins. “
Shale oil stocks. Kirk Spano takes note of the bankruptcy potential of these companies. His conclusion: “Sell your shale oil stocks now.” Read his full article for financial analysis and a few possible exceptions.
United Airlines (UAL). D.M. Martins Research continues the analysis of this sector by concluding that there are “better options” than UAL.
Why the big market rally? This is mainly the result of the overwhelming response from the government – far more than anyone expected. Except me. I’ve been writing about this for weeks. I am better at predicting what is likely to happen than the reaction of the markets. At this point, I should realize that taking into account policy changes is a continuing error by almost everyone in the investment community – intense skepticism about government and the will to act. This puts so many people on the wrong side of the market and then skews their future analyzes. I hope readers have found my comments helpful in keeping a balanced view and portfolio.
As we move up the chain of models, the conclusions of our sources become more contradictory. They often look like guesswork. You can find a billionaire investor or an expert on either side of the stock rebound issue, especially given the loyalty to the “must retest down” concept.
The economic effects are a little more conditional. Analysts realize that it depends on when a semblance of normalcy returns. There is still a very large error band on these estimates. The results depend on the willingness to take the risk of a new cycle of virus if the measures are relaxed too early. There is a lively debate about the implicit morality of these decisions.
Try to verify the credentials. Ignore economists speculating on policies that will come true. Ignore politicians discussing the implications of the science. Ignore the “Managing Directors of Associates Managing Directors” who discuss all of the above. Ignore sources that are “reputed to be famous” without real references. Ignore anyone who guesses what the market will do.
With the remaining sources, follow Rob Martorana’s guide to read investment news.
It is a special moment and requires special care. Here are my conclusions and what I do.
- Did you think you had an “all weather” portfolio? You have probably missed an opportunity to relax with the increased chances of recession. This will limit your chances of profiting from the possible rebound. Rebalancing your allocation will help, especially if you target purchases with the right stocks.
- AND F. Many stocks will not survive. Do you want to own them? An ETF combines the bad with the good.
- The market synchronizes the bottom. Someone will guess of course, but we don’t know who it will be.
- Selection of individual securities following a strict process.
- Will the business survive? Check the balance sheet, cash flow and Altman Z score.
- Use a revenue model like FAST Graphs. Check the sensitivity to the valuation of a short-term result.
- Use an income model like Professor Damodaran’s to view the reduced FCF. This will provide another sensitivity test using different inputs and assumptions.
- Sell volatility via covered calls or guaranteed put in cash.
That means doing your homework on each stock. It takes time but avoids costly mistakes and finds the best opportunities. If you are sheltered on site, you have time to do an additional stock assessment study!
- Rumors, disinformation and disinformation. Just when specific information is most needed, some are more interested in igniting fears or selling false hopes.
- North Korea. It’s too calm.
- Excessive public optimism about a return to work, putting pressure on decision makers to make a reckless decision.
- A great depression. There are signs of real progress. It will be a gradual return to work, and I will probably be in the last queue!
See also 62% of the S&P 500’s market capitalization may have better income than you think
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.