The Bull Market Is Dead…or is it?

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NO MORE BULL
A lowdown on the current landscape

The peak to trough decline of -30% in the S&P 500 in the first quarter effectively signaled the end of the 10+ year bull market. Shortly after reaching the lows, the index rebounded 21% in the last seven days of the quarter. This bounce-back has led some pundits to declare the newly minted bear market as dead on arrival. The velocity by which the decline and snap-back rally occurred was unprecedented. So where does that leave investors today? Has COVID-19 killed the bull market?

What we’re watching:

  • Bear market bounces of 20% are common.
  • The knock-on effects of 20 million unemployed have yet to be seen.
  • The stock market rebound has thus far been speculative. We won’t know the true impact of COVID19 on company earnings and the economy until next quarter.
  • We have yet to see mass scale testing, an effective treatment, or vaccine for COVID19.
  • Pricing dislocations in the bond market are signaling troubles.

The fastest bear market ever

February 2020 brought the fastest bear market correction for the S&P 500 in history. Peak to trough in the first quarter, we witnessed a maximum drawdown of -30% on the S&P 500, -34% on the Dow Jones Industrial Average and -20% on the tech heavy NASDAQ 100. These drawdowns were followed by rebounds of 17.4% on the S&P 500, 21% on the Dow Jones Industrial average and 12.7% on the NASDAQ 100.

The bear markets of 1929, 2000, and 2007, all experienced +20% bounces on the way towards a deeper decline. Though a retest of of prior lows isn’t a forgone conclusion, we’re still cautious. As the saying goes, “history doesn’t repeat itself, but it often rhymes.”

The U.S. lost nearly 20 million jobs in the past month

The magnitude of jobless claims in the U.S. has been unprecedented. This has prompted the Federal Reserve and Congress to deploy aggressive stimulus to help dampen the blow to the economy. Though these stimulus programs will undoubtedly help in the short term, these measures serve as only a temporary band-aid. Even once people start to go back to work, without mass COVID19 testing or an effective treatment, there is much trepidation as to what the post-pandemic economy will look like.

We have yet to see the full economic impact of social distancing

COVID19 will undoubtedly change how we interact for the foreseeable future. The St. Louis Fed estimates that 41 million US workers (roughly 35%) are employed in high contact-intensive industries. If demand for these services fails to bounce back to pre-pandemic levels, it is likely that some portion of these 41 million jobs will be lost permanently. We can also expect that social distancing mandates will have further downstream effects. For example, if the number of customers allowed in a store are limited, profitability will be hindered. As a result, the property on which the business operates will be worth less. If property values fall, so too will tax receipts, resulting in an inevitable death spiral of declining municipal services and diminishing property values.

On a positive note, this market dislocation has created significant investment opportunities in social distancing themed businesses. Home delivery, home cooking, in-home entertainment, and telecommuting, have all been powerful investment themes this year.

Volatility hits extremes

Not only has the spread of COVID19 been nothing like we’ve seen since the Spanish Flu, but we also just experienced the most volatile quarter for global stock markets ever. In normal times, daily returns in the S&P 500 index typically fluctuate between 1% to 2%. However, during periods leading up to and in recessions, volatility can be extreme.

2020 saw the largest single day decline for the S&P 500, posting a one-day decline of nearly -11%. As markets continue to digest the economic impact of COVID19, we could continue to see elevated volatility into the 2nd quarter. Uncertainty surrounding when the virus will plateau, reopening of the economy and God forbid any reemergence of the virus will certainly have an impact on how markets react in the back half of the year.

Positioning for 2Q20

Ultimately, nobody knows how 2020 will play out in the markets. Will the trillions in central bank stimulus be enough to offset the knock-on effects of mass unemployment? It is hard to tell. What is clear is the mass disruption that COVID19 has caused. This disruption both creates investment opportunities and clouds others.

In lieu of a clear path to eradicate the virus and reopen the economy, we expect volatility to persist. In this environment, portfolio weightings towards sectors/factors including utilities, consumer defensive, low volatility, and high quality fixed income could help investors weather the storm. Maintaining additional cash to deploy if valuations become more attractive may also be prudent.

Stay safe, stay invested, and wash your hands.

-Gordon Asset Management, LLC

Please feel free to call or email us with questions.

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Todd Zempel, CPFA, QKA, AIFA