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Adverse Effects of a Self-Induced Economic Coma

April 06, 2020
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Monday Morning QB - Market Observations:

  • 6.6 Million People Filed for Unemployment Benefits Last Week
  • Two Week Unemployment Claims Total almost 10 Million
  • Unemployment Jumps to 4.4% with the Worst Yet to Come
  • Non-Farm Payrolls Drop 701,000
  • Oil Prices Jumped Higher for the Week on the Hope of a Saudi/Russia Deal to Cut Oil Production
  • President Trump Warns of the Increase in the Death Toll from Covid-19 over the Next Two Weeks
  • Companies are Cutting their 401k Match to Preserve Cash…Leaving their Employees' with Less Money to invest at these Current Low Prices
  • 1st Quarter Earnings Reports Begin on 4/14…Look for Uncertainty Regarding Current Earnings

Monday Morning QB - Market Performance:

Last week, the major indexes closed lower for the week as we got our first glimpse into the adverse economic effects of our self-induced coma. 

The Dow Jones Industrial Average gave up 584 points to finish the week at 21,053, a decline of -2.7%. The technology-heavy NASDAQ Composite retreated -1.7%, while the large-cap S&P 500 ended down -2.1%.

The small-cap Russell 2000 and mid-cap S&P 400 retraced a large portion of last week’s gains finishing down -7.1% and -6.0%, respectively.

The smaller-cap indexes trailed by a large margin, with the small-cap Russell 2000 falling about 7% in a single session on Wednesday.

For March, the Dow Jones Industrial Average lost -13.7%, while the NASDAQ retreated 10.1%. By market cap, the large-cap S&P 500 ended down -12.5%, while the mid-cap S&P 400 fell -20.4%, and the small-cap Russell 2000 gave up 21.9%.

In the first quarter of 2020, the Dow declined -23.2%, the NASDAQ fell 14.2%, and the S&P 500 ended down 20%. The S&P 400 declined -30.0% while the Russell 2000 fell the most, 30.9%.

The end of March capped off the worst monthly and quarterly performances since 2008.

Coronavirus Kills Jobs and Increases Unemployment Claims

Adding to the large number of U.S. workers seeking unemployment benefits two weeks ago, last week’s claims more than doubled.

As a reminder- Jobless claims are an indication of how many workers have been laid off by their employers. Filing for unemployment benefits provides temporary financial assistance for those now unemployed.

Two weeks ago we saw an astonishing number-- 3.3 million Americans applying for unemployment.

Our shock increased exponentially with Thursday’s report showing new claims had jumped to 6.6 million, bringing the two-week total to around 10 million.

The rise in claims over the last two weeks is a significant about-face.

Our job market was the engine of growth throughout the 11-year bull market, reaching a multi-decade low for the unemployment rate. Economists now predict 25 million or more Americans could lose their jobs in the next few months.

On Friday, the March Non-farm Payroll Report was released.

Payrolls decreased by 701,000 jobs for March. The drop in payrolls was the largest monthly decline since March 2009. The unemployment rate rose to 4.4% from 3.5% in February, the largest one month increase in the rate going back to January of 1975.

Analysts believe the payroll report number will get far worse.

The Labor Department’s employment summary for last month came from a survey of businesses completed in the second week of March- just before the COVID-19 pandemic began to devastate the economy.

Therefore, the full effect of unemployment claims is missing from the payroll report. This disparity in timing means that additional people making unemployment claims will be in April’s payroll report due out on May 8th.

The April report is on track to be devastating.

When You Don’t Know the “E” in the P/E ratio (Price to Earnings per Share), Evaluations are Next to Impossible

As we enter the 1st quarter earnings season, starting on 4/14, we probably will experience companies reporting their earnings but refusing to give future forecasts.

Forecasts are just too hard to determine, given how many uncertainties remain regarding the near future of our economy.

Without the “E” in the P/E ratio, little confidence can exist in the current company values.

Our economy is in a coma.

Right now, no investor can accurately determine the real value of any company. All anyone can do now is guess. Most investors are unwilling to buy based on conjecture.

Given the uncertainties in a company’s value plus the uncertainty regarding the containment of the coronavirus, it is impossible to understand the potential depth of the decline in our GDP-- or the manner and timing of the subsequent recovery in the U.S. economy.

Our investment system is back down to a 0 to 25% position in stocks, depending on your risk tolerance. (See last week's MMQB blog's explanation of our four point fact-based system.)

Therefore, if your sleep quotient is low, consider selling rallies and sitting on your cash.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
Hayden Royal is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.
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