Covid-19 Still Not Showing in Claims Thu, Mar 12, 2020 Given its more backward-looking nature, economic data has taken a backseat over the past few weeks, but this also makes more timely data like weekly jobless claims ever more important. While risk assets continue to get hammered, weekly jobless claims have still yet to show any major layoffs as a result of the coronavirus. In fact, claims were lower this week, falling to 211K compared to estimates of an increase to 220K. Last week's number was also revised lower by 1K (from 216K to 215K). While there still has not been any new low, that leaves jobless claims basically in the middle of the past year's range which historically is still a healthy level. Although claims were lower this week, the four-week moving average has risen for a third consecutive week to 214K. While at face value that may sound bad, there have been seven other such streaks, some of which ran for longer, in the past year alone. Now at 214K, the moving average is not at any new high either, only at its highest level since late January. In other words, the move higher in the moving average over the past few weeks has been far from dramatic and still is too early to call it a change in trend. Non-seasonally adjusted numbers also remain at historically low levels with this week's 200.2K print being the lowest of the current week of the year of this cycle. That is also over 100K below the 333.06K average for the current week of the year since 2000.
Signs Of A Washout? The S&P 500 Index’s historic slide continued yesterday, culminating in nearly a 10% loss for the day, and leaving the benchmark index officially in bear market territory, just 16 trading days after setting a record high on February 19. In addition, the S&P 500 has now moved more than 4% each day this week, leaving investors and professionals alike wondering when this volatility could end. While nobody knows for sure, one thing we always look for at market bottoms are signs of extremes, both from a sentiment and price perspective. From an anecdotal sentiment perspective, certainly fears of COVID-19 have reached the masses, with travel plans canceled and announcements of major events called off coming nearly every hour. However, investor survey data shows a similar story with the American Association of Individual Investors (AAII) Investor Sentiment Survey showing the highest percentage of bears since April 2013. In addition, the National Association of Active Investment Managers (NAAIM) Exposure Index, which represents the average exposure to US equity markets by the surveyed investment managers, reached its lowest level since September 2015. Following each of those instances, the S&P 500 rallied more than 13% over the next year. Another way of gauging sentiment can be from the internals of the market. While the S&P 500 is now well below its 200-day moving average, that doesn’t mean each stock in the index has moved below its respective 200-day moving average. In fact, regardless of the broad market’s trend, when less than 20% of the individual components of the index are trading below their 200-day moving averages, it is considered an extreme. As shown in the LPL Chart of the Day, Thursday’s sell-off left less 6% of the S&P 500 there, a number last seen in March 2009. “These are truly frightening times,” explained LPL Financial Senior Market Strategist Ryan Detrick. “However, it is important to remember that the signs of panic we are seeing are typically found at or near major market lows.”
Friday 13th, DJIA Attempting to Recover & End Losing Friday Streak Friday is a significant day of the week because it is the last day of trading and positions held over the weekend could be at higher risk of an exogenous event or an unanticipated headline. Pages 143 & 144 of the Stock Trader’s Almanac 2020 show the difference in Friday performance during bull and bear markets. Friday’s have been weaker in bear markets. However today, on a Friday the 13th of all days, DJIA is fighting to recover some of its losses this week and to end its streak of down Fridays at seven. Down Friday DJIA losing streaks of seven or more, like the current streak, are actually somewhat rare in history. Prior to this year, DJIA has had just six similar or longer down Friday streaks going back to 1950. The last streak of down Fridays was in March and April of 2017. The longest streak lasted nine Fridays beginning on the last Friday of 2000 and lasting into February 2001. In the above chart the 30 trading days before and the 60 trading days after the last six DJIA down Friday losing streaks of seven or more have been plotted to display the average performance before and after the last down Friday of the streak. (There are on average 21 trading days in a typical calendar month) Weakness and lower was the trend during the down Friday streak, but once the streak came to an end, DJIA was higher 60 trading days later.
Fed Is All In The Federal Reserve (Fed) surprised markets over the weekend by holding its March 17-scheduled meeting a few days early and introducing a wide range of provisions. Those provisions are intended to add liquidity, increase credit availability, lower the cost of borrowing, and eventually support the economy’s recovery from the impact of COVID-19. Usually, Fed actions are fundamentally about setting the level of interest rates, and the Fed certainly made a statement there. As shown in our LPL Chart of the Day, the Fed lowered its policy rate a full 1% to a range of 0 – 0.25%, the first time the Fed has made a move that large in a single meeting since the savings and loan crisis of the 1980s. But the policy changes to increase liquidity and relieve funding stress will likely offer a more important short-term impact. “Lowering borrowing costs probably won’t make a big difference until we move toward recovery and business investment starts to pick up,” said LPL Chief Investment Officer Burt White. “This time around, the Fed’s job was to make sure that a serious global health crisis didn’t turn into a financial crisis by making sure businesses’ short-term funding needs could be met.” The measures to add liquidity included: A new quantitative easing program (QE) in which the Fed committed to buying $700 billion in bonds Making it easier for banks to use its discount window, a secondary source of funding Working with other central banks to make sure that US dollar demand could be met Temporarily reducing bank reserve requirements to zero Despite the measures, US futures markets were immediately jittery at open Sunday night, quickly falling 5% and hitting the circuit breaker to suspend trading. Market participants were seeing several things. First, while the Fed’s decision to move before the trading week began was prudent, it reinforced to markets that the Fed was starting to see levels of funding stress that it believed had to be addressed as soon as possible. The Fed also unavoidably highlighted the degree of economic uncertainty by declining to provide the economic projections that were scheduled to be released at the March 16–17 meeting, an appropriate move in our view. With the Fed’s policy rate now at zero, market participants may also be expressing concern that any future policy impact may be limited. Our view is that we may have come to expect too much from the Fed and other central banks. The Fed has always been very good at creating liquidity when needed (the main reason it was created), and has usually been effective at setting rate levels, but it cannot change the underlying fundamental cause of recessions. The Fed, of course, has no influence over the spread of COVID-19 or the immediate slowdown in economic activity that’s causing. But we believe the Fed stepped up in a big way this weekend and that it will continue to ensure that there is plenty of liquidity to meet short-term funding needs, while also being prepared to support the economy once demand starts to rebound.
Bear Market Playbook Having a playbook to follow can be very helpful during bear markets. It helped us here in the LPL Research department in 2008–09, and we think it can be helpful for the current situation. We all want to know the answers to the toughest questions, such as, how much further might stocks fall? Are we in a recession in the United States? Also, how long will the crisis last? These are extremely difficult questions to answer. Step #1: Follow your plan Our playbook for this bear market, which has some similarities to the version we used in 2008–09, starts with suitable investors having and following your long-term investment plan. Of course, it’s times like these when following a long-term plan is the toughest. Step #2: Identify the cause This was difficult in 2008, especially early on when the extent of the cracks in the mortgage market were not clear yet. Today it’s easier. Knowing the COVID-19 pandemic is the cause is important as we put together the rest of our playbook. Step #3: Identify Signals Next we move into the most important pieces we’re using to determine when we would recommend that suitable investors consider adding equity exposure to their portfolios, where appropriate. We’ve identified five criteria we’re monitoring that we believe may provide investors signals that it may be a good time to consider buying. “The playbook for investors during this environment starts with visibility into stabilization of new coronavirus cases in the United States, which we hope comes over the next several weeks,” noted LPL Financial Chief Investment Officer Burt White. “Some of the other questions we want answers to are: Is the US economy in recession? Has a recession already been priced into markets? Will policymakers’ response be sufficient to restore confidence? How many potential sellers might still be out there?” We’re getting closer to reaching all of these conditions, as shown in the LPL Chart, suggesting an inflection point may be approaching.
Homebuilders Not Worried Yet Tue, Mar 17, 2020 This morning the NAHB released results from their monthly survey of homebuilders. The index showed some weakening in sentiment as it fell to 72 in March from 74 in February. As with many other recent indicators released, that is a fairly modest decline given the current environment and likely would not have captured the full extent of equity market declines and shutdowns to enforce social distancing. Granted, those effects are also not entirely absent either seeing as the NAHB noted half of the responses to the survey came after March 4th. The headline index fell on lower readings pretty much across the board. Each of the sub-indices with the exception of the Midwest fell in March. Additionally, perhaps the biggest negative shift this month was for future outlook with that index falling 4 points. By comparison, the index for present sales only fell by 2 points. In other words, homebuilders seem to have experienced some slowdown in activity and are anticipating for it to get worse. Again the index for the Midwest in March was a bit of an outlier. It was the only region to rise in March, but that is after it was a bit weaker than other regions recently. In fact, the rise to 67 also still leaves the index for the Midwest 6 points off of the December high of 73. Overall, as with the headline index, across different regions, sentiment has shifted lower although this is likely just the tip of the iceberg. One factor at play that that may be balancing itself out is mortgage rates. The national average for a 30 year fixed rate mortgage was sitting at the low end of the past few years' range earlier this month. In the past week, though, mortgage rates have moved sharply higher and are now at similar levels to where they were last year. In other words, while low rates may have temporarily bolstered homebuilder confidence earlier this month, given the move in the past week, those effects have likely eased. Turning to next month's survey, there is likely to be a large downward shift lower in homebuilder sentiment, especially if rates continue to drift higher.
Looking To The Other Side of The Bear The indiscriminate selling continued yesterday, with one of the worst days in stock market history. Fears over the potential impact of COVID-19 (coronavirus) have led to one of the steepest sell-offs in history, rivaling what we saw in 1962 and 1987. With the S&P 500 Index down 30% from the all-time highs set less than a month ago on February 19, it is quite clear the stock market is voting on a significant economic slowdown over the coming months. Historically, during bear markets we have found that stocks pulled back 37% on average during a recession and 24% on average if a recession is avoided. With stocks currently down right near the middle of this, the economy could be about a coin flip to going into a recession or not. We discuss this idea and more in our latest LPL Market Signals Podcast. What happens next? “Clearly no one knows how bad things could get and when stocks will ultimately bottom, but we feel we are getting close,” explained LPL Senior Market Strategist Ryan Detrick. “The good news is a year after previous market corrections end, as scary as they all felt at the time, stock performance has historically been quite strong, higher more than 90% of the time.” As shown in the LPL Chart of the Day, since 1980, there have been 31 other 10% corrections or more for the S&P 500, according to data from our friends at Ned Davis Research. We’d like to stress, we don’t know when this weakness will end, but if we are close, the average return after a correction ends has been more than 23% on average and higher more than 90% of the time.
How Quickly Can Stocks Recover From COVID-19? The market volatility continues, as the S&P 500 Index has closed either up or down 4% or more for a record 7 consecutive days. With the S&P 500 Index down 30% from the highs, it has officially moved into a bear market. Yesterday, we took a look at how stocks did after the lows of major corrections formed, and today we’ll take another angle on this. We do not know if down 30% is the lows; in fact, it probably isn’t. The good news is we feel we are getting close to a major low. How quickly could stocks regain their February 19 highs? “Historically we’ve found that some of the quickest market sell-offs can lead to some of the fastest recoveries,” explained LPL Senior Market Strategist Ryan Detrick. “That’s the good news. The bad news is if the economy falls into a recession, it can take longer.” As the LPL Chart of the Day shows, there have been 14 previous bear markets since 1950, and it took an average of 20 months from the bear market lows to recover the losses*. Taking this a step further, when the economy avoided a recession, the recovery took only 10 months, versus 30 months for a recession, although a lot of that is because bear markets accompanied by recessions are typically deeper. Last, the last three bear markets that avoided a recession recovered the gains in 3 months, 4 months, and 4 months after the ultimate bear lows were made.
Stocks Approach 2009 Valuations vs. Bonds We rolled out our Road to Recovery Playbook at the start of the week to help investors gauge where the market is in its bottoming process. The first and most important piece of that playbook—visibility into a peak in new COVID-19 cases—remains elusive, but we hope to have a clearer picture with the next couple of weeks as containment efforts have more time to work. We continue to monitor cases daily and plan to update you on that progress regularly during this crisis. We’re getting closer to checking off the other four boxes. We would just like to see a bit more economic data consistent with recession—almost surely coming soon—and to get more clarity on the timing, size, and nature of the policy response before checking off those two boxes on our list. The technical analysis and sentiment box was checked last week—the amount of bearishness among investors is near the levels of prior bear market lows. The last box—markets pricing in recession—was also checked last week based on the magnitude of the sell-off. The nearly 30% drop in the S&P 500 Index from the February 19 high is close to the average peak-to-trough decline in recessions at about 35%. Another way to show a recession is priced in and stocks may be near their ultimate bottom is by valuing stocks relative to bonds, sometimes called the equity risk premium (ERP), which we show in the LPL Chart of the Day. “Stocks are now historically cheap by most measures after this selloff,” noted LPL Chief Investment Officer Burt White. “When comparing stock valuations to bond yields, we are approaching levels only seen during some of the worst bear markets over the past 50 years.” The equity risk premium compares the earnings yield on the S&P 500 (the inverse of the price-to-earnings ratio) to the 10-year US Treasury yield. That number as of March 18 was 4.9%, well above the long-term average of 0.8% (it was higher on March 16 when the 10-year Treasury yield was 0.73% rather than 1.18%). That compares to historical peaks between 6 and 7% in 1974 and shortly after the financial crisis. The bottom line is that if this trend holds equity investors could be well compensated over time for the risks they are taking now. _________________________________________________________________________ How Markets Bottom With US equities firmly in a bear market, even the most long-term investors are now looking ahead to when the selling may stop and where the S&P 500 Index might ultimately bottom. “Nobody knows exactly how this market bottom will play out,” said LPL Financial Senior Market Strategist Ryan Detrick. “However, using history as guide, we know markets tend to retest or even slightly break previous lows.” We took a look at how markets have bottomed for two previous bear markets that show similarities to the current sell-off, in terms of speed and magnitude. As shown in the chart below, following Black Monday, the largest single-day decline in the history of the S&P 500, the index rebounded modestly, before undercutting its lows about six weeks later. However, a look at the bottom panel shows that the momentum, or speed, of that move was significantly less extreme and markets went on to rally, ultimately eclipsing the 1987 peak less than two years later. The 2008-2009 financial crisis tells a similar story. While the S&P 500 Index didn’t ultimately reach its low until March 2009, most stocks actually bottomed during the fall 2008, following the collapse of Lehman Brothers. Even though the S&P 500 undercut the October lows by a full 10%, this divergence, similar to the momentum observed in 1987, shows that things were improving under the surface even if the price of the index didn’t yet reflect it. It may be too early to say that the initial leg of our current decline is done, but certainly we have seen extreme fear and a historic decline in markets. One positive—the S&P 500 has yet to close below its December 2018 lows. Soon it may be time to start hunting for signs of a bottom.
Road to Recovery Playbook Factor #1: Peak COVID-19 Cases As COVID-19-related fear continues grip global financial markets, we wanted to take a closer look at factor #1 in our Road to Recovery Playbook: confidence in the timing of a peak of new COVID-19 cases in the United States. This is probably the most difficult signal in the playbook to call with any degree of certainty. We can look to data from countries that were affected earlier for clues, but many country-specific factors contribute to the outcomes, e.g., societal norms (such as greeting with a kiss in Italy), population density, age distributions, prevalence of preexisting health conditions, smoking rates, air pollution, availability of testing equipment and criteria for administering tests, the compositions of economies, severity and speed of local governments’ containment measures, and even weather. The good news is that despite the wide range of factors, the number of COVID-19 cases so far has conformed to Farr’s Law of Epidemics, exhibiting a somewhat predictable bell curve normal-like distribution. Formulated in the 1800s by British epidemiologist Dr. William Farr, these laws predict that epidemics normally follow a pattern of sharp increase, a peak, and then a decline back to a baseline. The distributions of both new COVID-19 cases and related fatalities in China and South Korea have exhibited this behavior and appear to have ridden out the initial outbreak cycle. The City of Wuhan, China, which was the initial epicenter for the virus, reported on March 19 that it had zero new cases—showing us that the curve can be flattened and there is light at the end of the tunnel. The bad news is that countries now in the midst of outbreaks, including the United States, remain on the upward slope of the curve where the modified human behaviors predicted by Farr’s law, including social distancing, lockdowns, and treating the sick, have either yet to be fully implemented or have yet to take effect. Italy and Iran had the first outbreaks outside of Southeast Asia and appear to be further along in the curve than Spain, France, Germany, the UK, and the US. Growth of new cases in the US may be beginning to stabilize, after hitting what may or may not have been a peak on March 20. We must consider that the tougher containment measures implemented in many states may not have had enough time for the desired impacts. As shown in the LPL Chart of the day, the S&P 500 Index has continued to drop as the daily numbers of new COVID-19 cases in the US has grown (note that the scale of the S&P 500 line in the chart has been inverted). “While markets clearly reflect a lot of fear right now, we have reason to believe the improving patterns of infection seen in China and South Korea will be repeated in the other countries that now find themselves with major outbreaks,” said LPL Financial Senior Market Strategist Ryan Detrick. “While the nearly unprecedented level of volatility we are experiencing in stocks is historic, there is some light at the end of the tunnel.” We will get through this and the market will find its bottom. We have no doubt. The US economy came into this crisis on a strong footing, which should help it weather the storm. The fiscal response will reportedly be massive and unprecedented, which should help preserve jobs and position the US economy for a stronger recovery on the other side of this. We think long-term investors may be rewarded for sticking with their target allocations through this crisis and would recommend staying the course. There may be emerging opportunities for suitable investors to consider opportunistically – but thoughtfully and carefully – adding some risk to portfolios in the weeks ahead. Stay safe everyone.
Best Performing Russell 3,000 Stocks Tue, Mar 24, 2020 The Russell 3,000 is currently down about 35% from its February 19th high. With such a substantial decline in the index in just over one month, it should come as no surprise that only a small handful of individual stocks are higher since the 2/19 peak. In fact, less than 2% of the index has risen in that time. The bulk of these stocks are Health Care names. As shown below, there are 28 Health Care stocks that have risen since 2/19 with two, Tocagen (TOCA) and Vir Biotechnology (VIR) having doubled in price in that time. Sixteen other stocks have seen double digit percentage gains in that time. Of the stocks that are up in other sectors, many appear to be plays on a socially distanced coronavirus world. For example, in the Consumer Discretionary sector, the best performer has been food delivery and ordering app Waitr (WTRH) which has gone from $0.39 to $1.56. In that same vein, Domino's Pizza (DPZ) has also performed well. Outside of the Health Care sector, the only sector with a large number of stocks that are up are Consumer Staples. As with many of these other stocks, these seem to be plays on the COVID-19 economy. Multiple grocers, wholesale stores, and food related names make the list alongside cleaning product company Clorox (CLX). Additionally, despite the rout of Energy names, there also are four Energy stocks that have distanced themselves from the pack and risen since 2/19 -- TNK, SWN, DHT, EQT.
Time In The Market Versus Timing The Market The incredible volatility continues, with the S&P 500 Index now in one of its worst bear markets ever, along the way making the quickest move from an all-time high to down 30% at only 22 days. What is a long-term investor to do? “Although market timing is very alluring to investors, especially after the past few weeks, the reality is timing things incorrectly can set you back significantly,” explained LPL Financial Senior Market Strategist Ryan Detrick. “In fact, if you started in 1990 and missed the best day of the year each year for the S&P 500, your annual return was nearly cut in half.” As shown in the LPL Chart of the Day, the annualized return for the S&P 500 from 1990 to 2019 was 7.7%. Yet, if all you missed was the best day of the year, that return dropped to only 3.9%. Miss the best two days of each year, and you were up less than 1% a year. Taking it to the extreme, if you missed the best 20 days of each year, you’d be down 27% per year. No one can consistently pick the best or worst days of the year, so this is why it can be so dangerous for investors to miss time in the market by trying to time the market. If you miss one or two big days, compounded over time, this can greatly impact your portfolio.
Market Volatility Stresses Liquidity The COVID-19 pandemic has caused unprecedented volatility in recent weeks that has investors and traders scrambling to assess the economic and market impact of the aggressive containment measures. This past week the CBOE Volatility Index (VIX), which measures the implied 30-day volatility of the S&P 500 Index based on options contracts, measured its highest reading since its inception at over 82—besting the prior high set during the financial crisis in 2008-2009, shown in the chart below. That is saying something. As market participants have sought shelter from the storm in traditional safe havens such as US Treasuries, gold, or cash, we have seen signs that liquidity has dried up. All that means is buyers have become more tentative, demanding lower prices to get trades done due to the historic volatility and heightened uncertainty. That in turn can lead to wider bid-ask spreads for market participants—both retail investors and institutions—and we sometimes see a dollar of value selling for 95 cents, if not less. We have seen some of this in the corporate bond markets in recent days. Even short-maturity, high-quality investment grade corporate bond strategies have seen market prices disconnect with their fair value, as measured by net asset value (NAV). That metric essentially adds up the value of individual bonds in a portfolio such as an exchange-traded fund, which should in theory match the market price of the security that we all see on our screens. “In volatile markets, quality items go on sale to clear the racks because there aren’t a lot of shoppers walking through the malls,” noted Ryan Detrick, LPL Financial Senior Market Strategist. “Improving liquidity in all markets can help restore investor confidence after being shaken the past few weeks.” At their worst, these conditions can translate into serious dislocations, such as those experienced during the financial crisis when banks didn’t trust each other enough to make overnight loans and credit froze up. Short-term lending is a necessary lubricant for economic activity. Investors can get hurt selling into these dislocated markets. This is where the Federal Reserve (Fed) comes in. The programs the Fed launched on Monday, March 23—including buying large amounts of corporate bonds—are aimed at restoring health to credit markets. The central bank’s aggressive bond purchases (as much as needed) should help restore orderly trading in corporate bonds and narrow spreads, a measure of risk, which have widened significantly in recent weeks. As shown in the chart below, spreads are still well short of 2008-2009 highs. There is some other good news here. These dislocations can present opportunities for buyers to get discounts they may not otherwise see in normally functioning market environments. We aren’t suggesting running out and buying securities trading at the biggest discounts to their intrinsic value. Instead, we are highlighting that attractive opportunities are emerging in the corporate bond market, particularly in strategies focused on strong companies that may emerge on the other side of this crisis as leaders of the economic rebound.
Making Sense of Skyrocketing Jobless Claims Weekly new jobless claims were reported this morning, and to no one’s surprise they rose to levels thought unimaginable just a few weeks ago. As shown in the LPL Chart of the Day, 3.3 million people filed new claims for unemployment benefits in the week ending March 21, almost 5 times the previous high of 695,000 set in 1982. “The personal and economic disruptions represented by the latest new claims number are staggering,” said LPL Chief Investment Officer Burt White. “This is a genuine human crisis, and a robust response from the Federal Reserve and Congress seems appropriate. Unfortunately, we do expect more numbers like this in the coming months. At the same time, markets are forward looking and will be more focused on how quickly we might be able to get to the other side.” Per LPL’s Chart of the Day: While the number of new claims is extraordinary, it’s not entirely unexpected. The United States and countries across the globe have shut down entire segments of their economies in an effort to delay or disrupt the impact of the COVID-19 pandemic. Many of the jobs most impacted by social-distancing measures, such as cashiers, restaurant workers, and hotel staff, are in the services sector, which now makes up about 80% of the jobs in the United States. There is no silver lining in a number like this, but there is reason for hope. The US economy was not in a recession prior to the global spread of COVID-19. Workers are not being let go because of some structural fault in the economy or a financial crisis. As a result, when the slowdown ends, we may not see the extended hiring delay that has typically followed recessions. In fact, a surge in demand may require extra hiring, although it may not take place until people are fully confident that social distancing is no longer necessary. Markets may not be responding to the dramatic numbers seen this morning, but they have been absorbing the rapidly changing economic expectations it represents over the last few weeks. We’ll see a lot of this over the next couple of months: historic numbers with markets seemingly unmoved. But it’s not because they’re indifferent. Economic data is slow moving and backward looking, while our economic reality has been changing at an unprecedented pace. Even new unemployment claims, which are released weekly, seem somewhat stale. Markets will still be reacting to shifting expectations of the depth and duration of the slowdown, as well as the effectiveness of policies to help businesses and workers get to the other side.
Country ETFs' Drawdowns and Rebounds Thu, Mar 26, 2020 The COVID-19 pandemic has impacted equity markets around the globe. As shown in the table below, the equity markets of all the major global economies tracked in our Global Macro Dashboard (using each country's ETF as a proxy) are all well off their 52-week highs with only four—Taiwan (EWT), Switzerland (EWL), Japan (EWJ), and China (MCHI)—less than 20% away from the past year's high. While not as close as those four, the US is actually one of the countries that is closest to its recent high; down 'just' 23.2% after this week's rally. Brazil (EWZ), on the other hand, is currently the furthest below its 52-week high at 45.8%. The S&P 500 (SPY) peaked on February 19th and was down 34.1% from there at Monday's close. Including SPY, that Monday close has marked at least a temporary bottom for a number, though not all, of these country ETFs. Since then, SPY has risen over 15% and that is actually on the lower end of these countries' performance. The chart below shows how much each country's ETF has rallied off of their respective lows since the global sell-off began on 2/19. Russia has seen the biggest rebound having risen 28.18%. Granted, it also bottomed ahead of other countries putting in its low on March 18th. Even though it is down the most off of its 52-week high, Brazil is also one of the best performers since its low on Monday. South Africa and Canada have also risen more than 25% since their lows on Monday.
Can April’s Top-Month Record Extend Market Rally? April marks the end of the “Best Six Months” for DJIA and the S&P 500. The window for the seasonal MACD sell signal opens on April 1st. The unprecedented speed of the current market selloff and current bear market would appear to have made this year’s signal insignificant. This could be the case, but it is far too early to say if the worst of the bear market is over. Double-digit DJIA losses during the “Best Six Months” have only occurred three times (ending in April in 1970, 1974 and 2009) since 1950. In 1970 & 2009 the “Worst Six Months” were positive while in 1974 DJIA slide another 20.5%. April 1999 was the first month to gain 1000 DJIA points. However, from 2000 to 2005, “Tax” month was hit, declining in four of six years. Since 2006, April has been up fourteen years in a row with an average gain of 2.3% to reclaim its position as the best DJIA month since 1950. April is second best for S&P and fourth best for NASDAQ (since 1971). The first half of April used to outperform the second half, but since 1994 that has no longer been the case. The effect of April 15 Tax Deadline appears to be diminished with numerous bullish days present on either side of the day. Traders and investors are clearly focused on first quarter earnings and guidance during April. This year, guidance will likely be the greatest focus, as first and second quarter earnings are likely to be disappointing as a result of the coronavirus pandemic. Historically bullish election-year influences (the second-best year of the four-year presidential election cycle) have the exact opposite effect on April. Average gains since 1952 are approximately half of the average gain of all years since 1950 for DJIA and S&P 500. Largely due to a 15.6% loss in 2000, NASDAQ’s typical strength in all Aprils since 1971 is transformed into an average loss in election years.
Some Charts Hanging In There Tue, Mar 31, 2020 Given the route of equities across sectors over the past month and a half as well as the subsequent rally in the past week, most charts out there look very messy. Most have fallen off of a cliff, breaking any notable support levels in the process but others have held up relatively well during the COVID-19 collapse or have at least finally found support like Seagate Tech (STX). The nature of the businesses of names like Clorox (CLX), Campbell Soup (CPB), Hormel Foods (HRL), and Kroger (KR) never led them to see the same type of massive declines of many other cyclical stocks. Instead they continued to roughly trade within their uptrends and even surge to fresh highs in the beginning of March. After the rotation into the more beaten down names in the past week, these stocks are no longer as extended as they were but they now sit closer to the bottom of their uptrends. For example, earlier this month CPB broke out of the range it had been in for most of 2019 before it sold off back below that range. The past few days' rally has brought it back into this range. The same can be said for other names like Microsoft (MSFT), Netflix (NFLX), or NVIDIA (NVDA). These stocks had broken their uptrends but the moves had not been sustained to the downside as the past week's rally has kept those uptrends somewhat in tact.
Road to Recovery Playbook Factor #1: COVID-19 Case Update Factor #1 in our Road to Recovery Playbook is finding confidence in the peak of COVID-19 cases in the United States. At LPL Research we are monitoring this factor daily, and we wanted to provide an update into what we are seeing. As shown in the LPL Chart of the Day, while the number of new cases in the United States has continued to climb, the number of new cases seen outside of the US has begun to drop in recent days. In fact, Italy, the worst-hit country in terms of total deaths from the virus, reported on Tuesday that new cases hit a two-week low. This data is important because thus far the number of COVID-19 cases has conformed to Farr’s Law of Epidemics, exhibiting a somewhat predictable bell curve normal-like distribution. Formulated in the 1800s by British epidemiologist Dr. William Farr, these laws predict that epidemics normally follow a pattern of sharp increase, a peak, and then a decline back to a baseline. The distributions of both new COVID-19 cases and related fatalities in China and South Korea have exhibited this behavior and appear to have ridden out the initial outbreak cycle. The City of Wuhan, China, which was the initial epicenter for the virus, reported on March 19 that it had zero new cases—showing us that the curve can be flattened and there is light at the end of this dark tunnel. “The market’s bounce last week may have been in anticipation of some of these more positive data points regarding the virus,” said LPL Financial Senior Market Strategist Ryan Detrick. “While US cases continue to climb, the more countries that reach their peak, the more clarity we gain into what that timing may look like for the United States. Investors have historically been rewarded for investing during these crisis events, and we believe the time for suitable investors to consider adding some risk to their portfolios may be approaching.”
COVID-19 Hits US Manufacturing Sector With the US economy having entered recession, investors were braced for weak manufacturing data today. The report released this morning at 10am ET clearly showed the pandemic has negatively impacted the sector, but the headline number was actually quite a bit better than economists had forecast. The Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) for manufacturing dipped to 49.1 in March, down from 50.1 in February, as shown in the chart below. The reading is consistent with only modestly slower manufacturing activity, and is well above the low 40s levels historically consistent with recession-type levels of activity. There are several big caveats here. One is that the forward-looking new orders component, at 42.2, did fall to recessionary levels. Two, part of the strength was a quirky increase in supplier delivery times. Clearly, supply chain bottlenecks cannot be directly translated into manufacturing strength in the current environment, though they may support wholesale prices. Third, many respondent to the survey replied during the first part of the month. Clearly, conditions changed rapidly over the past week or two as stay-at-home and social distancing orders broadened. The manufacturing sector does not represent as big of a piece of the US economy as it did decades ago, but it has historically been a good signal for corporate profits, which is why we pay close attention to it. Recessions historically bring 15-20% downside risk to earnings, certainly a reasonable prediction at this point. “S&P 500 earnings per share in 2020 could potentially come in 20% below last year’s $163 figure, if not lower, based on the average historical haircuts to earnings during recessions,” noted LPL Financial Equity Strategist Jeffrey Buchbinder. “Even though today’s headline manufacturing data surprised to the upside, much of our services-led economy has grinded to a halt, which significantly impairs the near-term outlook for corporate profits.” The market’s focus will next turn again to the job market, with another unfortunate multi-million surge in jobless claims likely coming tomorrow, followed by March payrolls data on Friday which will almost certainly end the longest-ever streak of monthly job gains. More on that later this week.