Coronavirus Market Update

5/25/2020 - It appears that the SBA EIDL (loan) program is starting to accelerate.  This past week I have received several reports of movement from businesses that filed for Covid-19 aid at end of march.  IMPORTANT: You need to take additional steps if you received this email (see below).  Clicking the link will take you to the covid19relief1.sba.gov website and prompt you to create a login.  There are several steps in this this process including verifying your identity (answering 4 public records questions), and accepting the loan terms.  Universally, they appear to be 3.75%, 30 year term/amortization, one year deferral of payments.  Once submitted, the applications go through some form of final approval - to make sure you don't have more than 500 employees, aren't a bank, insurance company, or in a variety of industries that see to be considered socially detrimental.  If approved, you will need to log back in to sign the final loan docs (so keep your email with your login link).  From that point, funding seems to take 2-14 days.

As of 5/23/3030, the SBA is reporting* that they have approved over 430,000 loans totaling nearly $38 billion, and averaging about $88k per loan.

Consider carefully and work with your financial advisors to determine if accepting this government backed loan is right for you.:

* https://www.sba.gov/sites/default/files/2020-05/EIDL%20COVID-19%20Loan%205.23.2020.pdf

5/5/2020 - According to a NYT article published today, when you exclude New York, confirmed Coronavirus cases in the rest of the United States have yet not peaked.

So that could lead one to ask why the United States is lagging behind many other developed countries in managing the spread of the virus.

The answer isn’t completely clear, given the complexity of the virus. But the leading suspect, many experts say, is the uneven nature of the U.S. response — like the shortage of tests so far and the mixed approach to social distancing.

“The problem with the American response is that it’s so haphazard,” Ashish Jha, director of the Harvard Global Health Institute, told me.

One way to see the pattern is to look at the U.S. caseload outside the New York metro area. New York has been hit harder than any other city in the world, thanks to its large number of foreign visitors, its high population density and a slow initial response from its political leaders.

But New York has since engaged in fairly rigorous social distancing, and its caseload trend looks like that of a European country: up and then down.

In a world where much of the country is continuing to see increased caseload and pushing to re-open the economy at the same time, it can be difficult to predict exactly what the future holds; however, I think this article by Sharon Begley (reporting on work done by epidemiologist Michael Osterholm of the University of Minnesota and his colleagues) does a nice job of summarizing some of the potential futures we may be faced with.

They envision three possible futures, depicted as seascapes, their waves of different heights and widths approaching the unseen and unsuspecting beachcombers on a placid shore.

In one future, a monster wave hit in early 2020 (the current outbreak of millions of cases and a projected hundreds of thousands of deaths globally by August 1). It is followed by alternating mini-waves of much smaller outbreaks every few months with only a few (but never zero) cases in between.

In the second scenario, the current monster wave is followed later this year by one twice as fierce and even longer-lasting, as the outbreak rebounds after a summer when a significant drop in the number of cases and deaths led officials and individuals to let down their guard...

In the third possible future, the current wave creates a new normal, with Covid-19 outbreaks of nearly equal size and, in most cases, duration through the end of 2022.

Whatever the scenario, it is clear that coronavirus will continue to play a significant role in our lives for at least the next year or two, and will likely have long lasting social implications.

If you are looking for a more detailed overview of the virus, this article by Ed Young published in The Atlantic does a very nice job of summarizing why there is so much misinformation about the virus and why we are seeing such a wide range of reported mortality rates.

While there are some encouraging developments with a vaccine and new treatments (namely remdesivir), we still don't have a slam-dunk cure.

Gilead, maker of the antiviral drug remdesivir, announced that it was “aware of positive data” about the drug’s performance in a federal trial...

Dr. Anthony S. Fauci, director of the National Institute of Allergy and Infectious Diseases, said the trial had shown that treatment with the drug could modestly speed recovery in patients infected with the coronavirus.  The improvement in recovery times “doesn’t seem like a knockout 100 percent”

There were fewer deaths in the remdesivir group, but the result did not reach statistical significance, Dr. Fauci said.

In other words, our best pharmaceutical weapon at this point seems "modestly speed recovery" for those that would have survived anyway, and does little to help those who are at most risk.

4/30/2020 - We are now approaching two months since COVID-19 was officially declared a pandemic by the WHO.  Since then doctors and scientists have scrambled to get a firm grasp on just how virulent this disease is, and what actions should be taken to balance out public health interests and economic impact.  Despite all the efforts, we continue to see conflicting statistics and opinions from some respected sources.

On the one end, we have a piece written by Dr. David Williams, that seems to imply that containment efforts are a massive over-reaction and his analysis leans towards conspiracy theory.  Much of the article is opinion and some of his assertions and statistics appear to be at odds with the CDC, Johns Hopkins, and other major academic institutions.  Specifically, his conclusion that COVID-19 is less dangerous than the flu seems hard to reach when looking at the actual weekly death rates reported by the CDC that shows the average weekly flu deaths nationally this year is less than 500, whereas COVID-19 deaths average nearly 10,000 per week this month!  In addition, look no further than New York, where the disease was able to spread unchecked in a higher density population.  Johns Hopkins is reporting the statewide mortality rate among confirmed cases is nearly 8% among confirmed cases.  I think we can safely cut that number down by several fold (maybe 10 fold or more) as there are likely a lot of unconfirmed cases; however, seeing nearly 1 in 10 who seek medical care die does not seem to be less dangerous than the seasonal flu.

On the other end we have a new UC Berkeley study comparing daily deaths in Italy over the last 6 years finding that the fatality rate of COVID-19 is dramatically higher than the seasonal flu, and that overall mortality "can be no less than 0.5%, or one of every 200 people infected."  That is over 5 times higher than the season flu.  This study is at odds with a recent Stanford University study showing the mortality rates more like double that of the seasonal flu.  All observers appear to agree that COVID-19 disproportionately kills the "weakest segments of the population."

4/27/2020 - According to pymnts.com, the SBA started accepting the second round of PPP loan applications today at 10:30am EST.  If you own a small business and have not submitted an application through your bank, now is the time.  It is anticipated that funding for this round could be exhausted with-in two days.  "Applications can be made through any SBA 7(a) lender or through any federally insured depository institution, federally insured credit union or participating Farm Credit System."

For more details on PPP loan forgiveness, see this article by The National Law Review.  In summary:

• Payroll costs that are eligible for loan forgiveness:
  • Salary, wages, commission or similar compensation (recent SBA guidance states that payroll costs include all cash compensation, including a housing stipend or allowance)
  • Payments for vacation, parental, family, medical or sick leave
  • Allowance for dismissal or separation
  • Payments for the provision of group health care benefits, including insurance premiums
  • Payments for retirement benefits
  • State or local payroll taxes
• Payroll costs that are not eligible for loan forgiveness:
  • Payments to an independent contractor
  • Cash compensation in excess of $100,000
  • The employer’s share of federal payroll taxes
  • Qualified sick leave and qualified parental leave wages for which credit is allowed under the Families First Coronavirus Response Act (FFCRA)
    

Additional non-payroll costs which are eligible for loan forgiveness:

• Interest payments on a mortgage incurred in the ordinary course of business on real or personal property and that was in existence on Feb. 15, 2020
• Rent payments under leasing agreements in existence on Feb. 15, 2020 
• Utility payments for electricity, gas, water, transportation, telephone or internet for which service was in existence on Feb. 15, 2020

4/21/2020 - As congress looks to pass an extension of the popular PPP program today (to support small businesses with low cost government backed loans), we are starting to see where the original $350 billion went. 

According to Morgan Stanley, the SBA allocated over $243 million to to publicly traded companies (see chart below), and according to The Hill "Ruth's Chris Steak House, which has 150 locations and $468 million in revenue, received $20 million in loans. The sandwich chain Potbelly, which has more than 400 locations, and Shake Shack, with more than 200 branches, each received $10 million from the fund."

If you have not applied for your PPP through our bank, don't blink or you may miss the opportunity entirely.  Politico is reporting:

"it may buy only a few days before the program screeches to a halt once again.  Lenders are warning their customers they might not be able to secure loans even if Congress provides an additional $300 billion as soon as this week. Banking industry representatives say the program has a burn rate of $50 billion per day and needs closer to $1 trillion to meet demand, with hundreds of thousands of applications pending.

'This is going to go within, at most, 72 hours,' said Consumer Bankers Association President Richard Hunt, who represents large banks. 'But the odds are more like 48 hours.'"

4/21/2020 - Simply put, the crude market is treacherous.  Today's continued collapse in values follows yesterday's unprecedented negative price (on the "front" month contract).

*Price as reported by NYME as of 2:43pm EST via cnbc.com

The oil market works on monthly futures contracts.  You can see various delivery months and corresponding price in the quotes above.  The "front" contract being May, the "Second" delivering in June, "Third" in July, etc.  If you own one of those contracts when they expire - on the third business day before the 25th calendar day of the month (for example today is the expiration for May 2020 delivery), you will be expected to take physical delivery of 1,000 barrels of crude oil.  I personally don't own any pipelines, tanker trucks, or storage tanks.  So that could leave the holder to pay additional brokerage and storage fees until they are able to sell the oil or short and hold the following month's contract.

So the market for these contacts close to expiration is generally limited to only those who can take physical delivery.  So what happens when most buyers of physical oil are out of storage?  The price drops.  How far?  Yesterday, the May delivery contract (that expires today) turned negative.  In other words, some traders were left holding expiring contracts with very few buyers on the other side, and they were willing to pay someone to take the oil off their hands in order to avoid the hassle and cost of holding the contract past expiration.

"The price of U.S. benchmark crude that would be delivered in May was selling for around $15 a barrel Monday morning, but fell as low as -$40 per barrel during the day. It was the first time that the price on a futures contract for oil has gone negative, analysts say."

“It’s the worst oil price in history, which shouldn’t surprise us, because it’s the inevitable result of the biggest supply and demand disparity in history,” said Ryan Sitton, commissioner at the Texas Railroad Commission, which regulates the state’s oil industry.

While we are seeing steep losses in popular Oil ETF's too, these vehicles generally sell out of the near contract (the one closest to expiration that went negative yesterday) a couple weeks ahead of expiration.  So they did not reach zero or go negative.  Due to massive inflows (see chart below) and "extraordinary market conditions", some ETF's are now spreading their exposure over more distant contracts to reduce the volatility, increase liquidity, and more accurately reflect the actual value of oil.

Buyer beware: If you are invested or planning to invest in an oil ETF (or any kind of commodity), it's very important to understand the mechanics of the commodities market, composition of the investment vehicle, and how the current "super contango" environment in the oil market can work against you - exacerbating loses and limiting any eventual recovery. 

Contango describes a situation where the future price of commodity is higher than the current "spot" price.  When a commodities trader (or ETF) holds a front contract, as discussed above, they will have to sell that contract at some point before expiration.  If the proceeds are re-invested into the "second" (the next expiration contract), in order to maintain the exposure into the asset, they may have to pay a higher price.  In the case of oil, this would mean buying contracts for fewer barrels of oil each month.  As an example, if the next contract was 10% more expensive every month for 6 months, we would only hold about half of the original investment (53%)!  So when the asset finally recovers, you don't own as much and therefore you may not ever recover your initial investment even though the spot price of the commodity has fully recovered.

4/20/2020 - In a NYT report published over the weekend written by Donald G. McNeil Jr. who is a science and health reporter specializing in plagues and pestilences, we find the following compelling conclusions:

• There is enormous uncertainty. In the best case, scientists would develop a vaccine or — more likely — treatments for the coronavirus’s effects. It’s also possible that the virus will mutate to become less severe. These outcomes are possible but are not the most likely ones.
• Social distancing is still vital. About 300 million people in America have probably not been exposed to the virus, and epidemiologists say that until a vaccine or other protective measures emerge, it’s not safe for that many people to suddenly come out of confinement.
• It’s unclear how well the U.S. will cope with the next phase. As more people with immunity get back to work, more of the economy will recover. But if too many people became infected at once, new lockdowns would be needed. To avoid that, widespread testing will be imperative.

MIT has developed a machine learning algorithm that uses data on the disease's spread to evaluate various quarantine efforts and predict the future spread.  The bottom line: “If we relax quarantine measures, it could lead to disaster,” says Professor George Barbastathis.

"The model finds that in places like South Korea, where there was immediate government intervention in implementing strong quarantine measures, the virus spread plateaued more quickly. In places that were slower to implement government interventions, like Italy and the United States, the “effective reproduction number” of Covid-19 remains greater than one, meaning the virus has continued to spread exponentially."

4/17/2020 - As our country looks past the stay-at-home orders, it will be important to remember a point I made about a month ago - see my 3/20 post below regarding Mary Mallon.  Because of the U.S. policy to only test people actually suspected of being infected, asymptomatic carriers may account for the majority of spread and reignite the "hot spots" once we start to lift the social distancing restrictions.  Recent data about the sailors aboard the U.S. aircraft carrier Theodore Roosevelt as published in a Reuters article today supports that belief:

"Sweeping testing of the entire crew of the coronavirus-stricken U.S. aircraft carrier Theodore Roosevelt may have revealed a clue about the pandemic: The majority of the positive cases so far are among sailors who are asymptomatic, officials say.

The possibility that the coronavirus spreads in a mostly stealthy mode among a population of largely young, healthy people showing no symptoms could have major implications for U.S. policy-makers, who are considering how and when to reopen the economy.

It also renews questions about the extent to which U.S. testing of just the people suspected of being infected is actually capturing the spread of the virus in the United States and around the world.

'With regard to COVID-19, we’re learning that stealth in the form of asymptomatic transmission is this adversary’s secret power,' said Rear Admiral Bruce Gillingham, surgeon general of the Navy"

The implication for the economy of this stealthy asymptomatic spread is slower recovery as we face prolonged social distancing measures, even if we eliminate the full stay-at-home orders.

I would also like to share with you an excerpt from a post one of my clients shared the other day, it appears to be in wide circulation now and I'm unable to trace it's origin; however, the truth of this is self-evident:

"For weeks I have heard people saying: 'I just can’t wait for things to be back to normal.' I remember even saying that a few times myself. But as I’ve thought about our current situation I have realized how much I don’t want things to go back to the way they were...I pray that we take the lessons and challenges of the past few weeks and create a new normal. "

Be it spending time with the people we care about, educating those we love, pursuing our passions, or simply going to the movies, I hope we all can be more thoughtful and appreciative.

CARES Act Update: PCIA has published a new whitepaper on the resources available to individuals and businesses.  Be aware that according to an Inc article the SBA is out of funds for PPP (bank originated) loans.  While congress is widely expected to sign off on additional funds as early as this week, it could put up another hurdle for non-essential businesses with little or no revenue.  Please don't hesitate to reach out with your questions using the button at the top of this page.

4/15/2020 - The SBA has been sending out the following email to EIDL applicants this week, confirming the rumored $1000/employee grant limit (up to $10k) and encouraging applicants to also apply for PPP loans through their bank.  I'm beginning to hear from EIDL applicants that the grants (up to $10k) are beginning to move; however, no details have been sent by the SBA regarding additional direct loan amounts (up to $2m).  This website may give us a wider view into the application status than my limited anecdotal reports can provide - the website purports to track the status of EIDL and PPP grants and loans through voluntary submission of individual applicants (so be sure to add plenty of salt).

Also this week, the IRS launched a website for individuals to check the status of their CARES Act economic relief payment.  

Dear Applicant,

On March 29, 2020, following the passage of the CARES Act, the SBA provided small business owners and non-profits impacted by COVID-19 with the opportunity to obtain up to a $10,000 Advance on their Economic Injury Disaster Loan (EIDL). The Advance is available as part of the full EIDL application and will be transferred into the account you provide shortly after your application is submitted. To ensure that the greatest number of applicants can receive assistance during this challenging time, the amount of your Advance will be determined by the number of your pre-disaster (i.e., as of January 31, 2020) employees. The Advance will provide $1,000 per employee up to a maximum of $10,000.

You may be eligible for another loan program, the Paycheck Protection Program, which is available through participating lenders. Below is a comparison of the two loan programs:

                                 Paycheck Protection Program                  Full EIDL Loan

4/13/2020 - The market is open and trying to digest the latest COVID-19 news after a 3 day Easter holiday break, and following last week's massive rally - the S&P surged 12.1%, the largest week gain since 1974.

The following commentary is from the PCIA Quarterly Client Update:

From Bull to Bear
Most importantly, please know our hearts go out to all of those impacted from the COVID-19 pandemic, especially those that have fallen ill, and those who find themselves suffering during this truly unprecedented fallout.

As we entered this new decade, we had done so with a cautiously optimistic outlook. The market benefited from a powerful rally at the end of 2019, driven by a “phase one” trade agreement with China, low interest rates, and a robust labor market. Analysts were forecasting a return to higher growth rates for corporate earnings, recessionary fears were fading, and stocks were reaching for all-time highs. The cautious optimism instantly eroded as the Coronavirus (COVID-19) quickly turned from a China-isolated epidemic to a global pandemic of frightening proportions. As the case count soared and containment failed, markets began to rapidly assess the economic impact that social distancing measures would have on the global economy; bringing many countries and industries to a grinding halt and impairing the global supply and demand chains. With the markets’ assessment and rapid sell-off, in what felt like a blink of an eye, the equity markets entered into a bear market, bringing our country’s longest bull market in history to an end in March. As if a global pandemic was not enough for markets to grapple with, a price war between Russia and Saudi Arabia coupled with an abrupt lack of global demand caused oil to turn in its worst quarter ever. With the market now dealing with not one, but two exogenous events, investors ran for the door, looking to sell risk assets as quickly as possible. The S&P 500 fell by as much as 34% from its highs before rallying to close the quarter off -19.60%. The Dow Jones Industrial Average officially registered its worst first quarter in history, finishing down -22.73%. Small caps fared even worse, as the Russell 2000 cratered -30.61%.

With the Coronavirus originating in China, the world’s second largest economy was forced to shut down for most of the first quarter. Unfortunately, many developed international countries were already on fragile ground and rely heavily on China for imports, causing increased strains on frail economies trying to combat COVID-19.  These pressures sent the MSCI EAFE and MSCI Emerging Market indexes down -22.72 % and -23.57% in the first quarter, respectively.

During times of uncertainty, many investors sell equities and flock to the safe haven of bonds. As fears grew that the impact on global capital markets could be more severe than ever imagined, investors attempted to unload nearly any security-possessing risk. Though they mounted a comeback to close out the quarter, even investment grade corporate bonds were not safe from the storm and experienced selling pressure; with the iShares iBoxx Investment Grade Corporate Bond ETF selling off more than 3%. YTD. The only place to hide was cash or U.S. treasuries. Given the heavy allocation to U.S. treasuries in the benchmark, the Bloomberg Barclays U.S. Aggregate Bond Index was one of a few bright spots, delivering a positive return of 3.15%.


Unprecedented Market Movement
In normal times, the market may take two to three months to earn a return of 5%, yet the average daily price swings in March were almost +/- 5%. Investors witnessed the market fall more than 12% in a single day, marking the largest single day move since the 1987 Black Monday crash, only to be followed by gains greater than 11%, marking the best day since 1933. The market hit its peak on February 19, 2020, but a mere 16 trading days later, the market would fall more than 20%, officially entering a bear market in the quickest fashion.  To put that pace in perspective, from 1950 to 2019, on average, a bear market took 401 days to reach.

While volatility in the first quarter was truly unprecedented, markets have endured disruptions and crises in the past. Since 1989, the S&P 500 experiences average intra-year declines of -13.5% annually, and has finished the year in positive territory 81% of time; averaging a positive 12.1% per year. We’re not suggesting that 2020 will see the S&P 500 end in positive territory, but it’s simply a reminder for investors that volatility is normal and we need to try our best to control what we can - focusing on the long-term.

Unprecedented Job Loss
As mentioned above, we entered this crisis with a very robust labor market, as the unemployment rate sat at a 50-year low near 3.5%. Just as our nation’s longest bull market came to an end, as did the streak of 113 consecutive months of job growth, with unemployment jumping to 4.4%. March’s job report officially registered a loss of 701,000 jobs, but the data collected was only through the week ending March 12; before the nationwide lockdowns and social distancing mandates were enforced. Sweeping shutdowns drove unemployment claims to weekly all-time highs of more than 6.6 million in each of the past two weeks in late-March and early-April, bringing the last three-week tally to more than 16.5 million jobs lost. To put that in perspective, the highest weekly total in the 2008-2009 Financial Crisis was approximately 665,000. With these numbers only trending upward, it’s understandable why Bloomberg is projecting unemployment in April will approach 15% or higher. Hopefully, the elevated rate of unemployment will be somewhat transitory. As lockdowns are lifted and a normalcy returns, a good portion of the jobs lost will be regained. Service industries such as restaurants, retail, and hotels will rehire many, but not all, of the employees laid off. Additionally, many of the small, medium, and large businesses accepting loans under the recent government stimulus package will be required to maintain minimum employment levels. However, our economy has not endured an actual shutdown of this magnitude, so the longer-term impact on employment remains difficult to predict.

Unprecedented Government Stimulus
To help combat the unprecedented levels of unemployment and keep the economy afloat, the federal government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The total size of this package exceeds two trillion dollars, which represents over 9% of U.S. annual GDP. Comparatively, the fiscal stimulus during the Financial Crisis was $800 billion, making the CARES Act 250% larger. While every day without an agreement felt like an eternity, in reality, the CARES Act was the quickest stimulus package ever to receive approval through Congress. Key provisions are highlighted in the chart below.



The CARES Act is intended to help consumers and displaced workers through enhanced unemployment benefits and direct payments, but also to provide a lifeline to both small and large businesses that have been impacted through largely no fault of their own. With the goal of aiding small and large businesses, in looking at the loan and grant stipulations, it appears Congress’ intentions had the individual consumer front and center. Stipulations such as maintaining minimum levels of pre-COVID-19 employment, capping executive compensation, disallowing the payment of dividends on common stock or buying back outstanding shares highlight Congress’ desire to ensure people get back on their feet, and stay on their feet. Before president Trump’s ink could even dry, politicians already started whispers of additional fiscal stimulus requirements; with some predicting the government spending reaching upwards of six trillion dollars, or roughly 27% of US GDP, to combat the fallout from the Coronavirus.

Unprecedented Monetary Stimulus
In a surprising action on March 3, the Federal Reserve was the quickest to respond to combat the economic fallout from COVID-19. While typically more reactionary and measured in their approach, the Fed took aggressive proactive measures making their largest single rate cut of 0.50% (or 50 basis points) between scheduled Federal Open Market Committee (FOMC) meetings; the first time the Fed had taken such measures since the 2008 Financial Crisis. Less than two weeks later, again between scheduled meetings, the Fed dropped the rate on the Fed Funds effectively to zero. As the fear of the economic fallout escalated and oil continued to plummet, investors tried to sell nearly any asset containing risk; including any bond that wasn’t a treasury. While there were plenty wishing to sell, there were only a few looking to buy, creating an extraordinary dislocation across most bond categories. In order to bring back liquidity, the Fed again engaged in unprecedented measures by not only purchasing treasury securities and mortgage-backed securities, but for the first time ever, also stepping in to support municipal bonds, agency securities, and even corporate bonds through the purchase of Exchange Traded Funds – truly unprecedented. The Fed’s QE bond buying program has already seen the Fed’s balance sheet grow more than one trillion dollars; pushing their total balance sheet size above five trillion dollars. The Fed has failed to put a limit on the extent of their bond buying, leaving the amount available open-ended, but they have already purchased more in one day now than in an entire month during the Financial Crisis (80 billion).

As part of the CARES Act, the Treasury Department is looking to the Federal Reserve to create the large business lending program, in which $454 billion is earmarked for the joint program between the Fed and Treasury. This is an important point because under the authorities granted to the Fed under the Federal Reserve Act, which predates the CARES Act, when the Fed declares that circumstances are unusual and exigent, and the Treasury agrees, the Fed can set up special programs that essentially buy debt from, or extend loans to, large and small businesses. Rather than the Fed simply printing the money and taking on additional credit risk, the Fed leverages the Treasury to insure against losses. Given that the Fed expects most loans to be repaid, the Treasury provides more than a dollar for dollar support, otherwise the actual lending power under the loan program would indeed be $454 billion. However, the Treasury gives the Fed a 10 to 1 ratio, giving the Fed actual lending authority up to $4.5 Trillion dollars under this loan program. Through the Fed’s bond buying program and their CARES Act lending, the Fed’s balance sheet is expected to balloon from the post Financial Crisis lows of around $3.5 trillion to just under $13 trillion. Perhaps drawing on lessons learned, the combination of the CARES Act and Federal Reserve action now dwarfs the governmental stimulus response throughout the entire Financial Crisis in 2008-2009.

Moving Forward
While the market’s focus is currently pinned to every headline surrounding the Coronavirus and/or an end to the Russia and Saudi Arabia oil price war, that focus will quickly turn to company earnings in the coming weeks. The current environment has made valuing a company extremely difficult. Many companies have already suspended providing guidance through 2020; a trend which will likely continue. Some analysts are projecting earnings contractions in line with the 40%+ contraction experienced during the Financial Crisis, along with dividend cuts greater than 20%. We wouldn’t be surprised to the see companies look to throw out the kitchen sink during the upcoming earnings releases, blaming every negative data point on the shutdown caused by COVID-19. With extremely negative results expected, we anticipate rather than focusing on whether a business beat or missed estimates, that the street will be focused on a forward-looking guidance that senior leadership provides.

Given the level of uncertainty around upcoming data, predicting the path forward for the economy is difficult.  The depth and duration of the recession is more reliant on medical progress than anything else. The quicker the spread of COVID-19 can be contained, flattening the curve, the quicker the economy can begin to get back on its feet. Once stay-at-home mandates are lifted, many expect everything to snap back to normal. Our view is a bit more cautious. Unlike other nations, such as China, that may drive more of their revenue from manufacturing and exporting goods, the U.S. net imports and 68% of our economy comes from business and retail consumption. A big question remains as to how the consumer will respond once the stay-at-home restrictions are lifted. The U.S. Government has tried to help fill the void with more spending, and rumors are flying about a potentially historic infrastructure package, but to avoid a deep recession, we have to help maintain the strength and confidence of the everyday consumer, which is why we believe the CARES Act, along with additional expected stimulus, is so critical.

After 2019’s large gains across most major asset classes, we performed significant rebalances moving back to target weights in our portfolios, effectively taking some risk off the table. We also continued to emphasize quality across our portfolios, including underlying managers who have demonstrated successful track records of participating in up markets, but more importantly protecting on the downside. In March, we were able to capitalize on the lower prices by opportunistically rebalancing portfolios again, reducing bonds and increasing our equity allocations back to their intended target weights. Many segments of the market experienced significant dislocation, resulting in both temporary and permanent impairments. As such, during our rebalancing, we took the opportunity to reduce asset classes facing more lasting concerns, and increase our exposure to asset classes demonstrating stronger balance sheets, more robust earnings, and viable access to credit. When events unfold like we’re currently experiencing, it’s easy to panic. One of our responsibilities is to remove emotion from our investment decision-making process, striving not to make knee-jerk reactions. Especially, in the absence of complete data, we believe it would be imprudent to make rash or sweeping investment changes at this time. We will remain committed to a diligent process in efforts to bring our clients consistent long-term results.

Finishing as we started, please know that our hearts truly go out to all of those impacted from the COVID-19 pandemic, especially those that have fallen ill, and those who find themselves suffering during this truly unprecedented fallout. Here’s to hoping for a return to normalcy in the very near, not-so-distant future.

The preceding commentaries are (1) the opinions of Chris Osmond and Eric Krause and not necessarily the opinions of PCIA, (2) are for informational purposes only, and (3) should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.

4/9/2020 - According to Sen. Carden, father of SBA section of the CARES Act, live on senate floor today:

• EIDL Grants
  • Up to $10k per business, supposed to be paid within 3 days of application.
  • Over 3.5 million requests submitted.
    
  • SBA is using a sliding scale to assign funds to applications with an average of $3,142 per business.
  • Some businesses have been told by the SBA that they will receive $1000 per employee.
    
  • Grant fund is substantially underfunded even with the sliding scale.
  • SBA isn't releasing any funds, implying the issue is a matter of "fairness"
    

• EIDL Loans
  • Originally up to $2m per business.
  • Average loan request is $200k.
  • SBA only has funds for a maximum loan of $15k.
    
  • SBA has asked congress for an additional $50b.
• PPP Loans
  • Issued through a bank, SBA backed.
  • Fund is not exhausted, only 30% of funds committed.
  • Some banks have begun closing loans

4/5/2020 - I thought this letter, originally sent by by Professor Jonathan Smith to about 50 of his neighbors, is worth sharing and a few minutes of your time to read.  Prof. Smith is an award winning lecturer in epidemiology at Yale University, while completing a PhD at Emory University.  Here is an abridged version if you're short on time:

"Specifically, I want to make two aspects of these distancing measures very clear and unambiguous. First, we are in the very infancy of this epidemic’s trajectory. That means that even with these measures in place, we will see cases and deaths continue to rise...  This may lead some to think that the social distancing measures are not working. They are.  They may feel futile. They aren’t."

"The enemy we are facing is very good at what it does; we are not failing. We need everyone to hold the line as the epidemic inevitably gets worse.  This is not an opinion. This is the unforgiving math of epidemics... Stay strong and in solidarity knowing that what you are doing is saving lives, even as people continue getting sick and dying.  You may feel like giving in. Don’t."

"You should perceive your entire family to function as a single individual unit: if one person puts themselves at risk, everyone in the unit is at risk."

"The basic mechanics... dictate that even if there is only a little bit of additional connection between groups (i.e. social dinners, playdates, unnecessary trips to the store, etc.), the epidemic likely won’t be much different than if there was no measure in place."

"If your son visits his girlfriend, and you later sneak over for coffee with a neighbor, your neighbor is now connected to the infected office worker that your son’s girlfriend’s mother shook hands with."

"It is hard (even for me) to conceptualize how on a population level “one quick little get together” can undermine the entire framework of a public health intervention, but it can.  I promise you it can. I promise. I promise. I promise. You can’t cheat it."

"This outbreak will not be overcome in one grand, sweeping gesture, but rather by the collection of individual choices we make in the coming months. This virus is unforgiving to unwise choices."

4/4/2020 - Just a heads up, CNBC is reporting that "Oil is set to 'crater' Monday as OPEC meeting delayed, tensions flare between Saudi Arabia & Russia... the virtual meeting between OPEC and its allies scheduled for Monday has been postponed... the meeting will now 'likely' be held on Thursday"

This is after Trump tweeted two days ago "Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry! .....Could be as high as 15 Million Barrels. Good (GREAT) news for everyone!"

Apparently, the NYT called it: "Trump Promotes Oil Deal That May Not Exist"

I would also point out that the President's "Friend" (Mohammed Bin Salman) has been accused, by the CIA, of ordering the murder of journalist Jamal Khashoogi, among other misdeeds.

The lessons for today: Commodities are volatile and unpredictable, you can't believe everything you read on Twitter...and most importantly, we should focus on the long term.

Here is a great, albeit simplistic, chart by Carl Richards.  It reminding us to stick to our well developed investment strategy.  If you don't have a strategy that can withstand downturns like this year, you need to get one, fast.

4/3/2020 - In a plot twist that is shocking to no one, China's coronavirus numbers aren't reliable:

"American intelligence agencies have concluded that the Chinese government itself does not know the extent of the virus and is as blind as the rest of the world."

"Midlevel bureaucrats... have been lying about infection rates, testing and death counts, fearful that if they report numbers that are too high they will be punished, lose their position or worse, current and former intelligence officials said.

https://www.nytimes.com/2020/04/02/us/politics/cia-coronavirus-china.html?campaign_id=9&emc=edit_NN_p_20200403&instance_id=17311&nl=morning-briefing&regi_id=63289552&section=topNews&segment_id=23741&te=1&user_id=4f63537ddfc39ac241e0b7bdcd708677

4/2/2020 - If you own a small business and have not yet applied for SBA assistance, see my post from 3/30 (below).

Today's oil market action is a great reminder that we we need to stay focused on the long term and not get pulled in to the seesawing news that is pulling the market violently up and down each day.  Take a look at this CNBC article published this morning at 1am that paints a dire picture for oil prices, pronouncing:

"now some forecasters are calling prices as low as $10 or even single digits as the world runs out of storage space and the global economy grinds to a halt."

To put that in context, oil was trading around $20 per barrel yesterday and has fallen from an average of almost $60 per barrel last year.*  Now, contrast that with this article published at 7am (just 6 hours later)!

"Oil surges more than 20% after Trump tells CNBC Saudis, Russia reach production cut agreement"

Some analysts believe that oil prices will trend back to $60-80 per barrel over the next couple years, so enjoy the low gas prices while you can.  However, I highly doubt this is the last violent about-face we will see in the oil market, so caution is highly advised if you are planning on adding oil to your portfolio.  Commodities are, have been, and will always be volatile assets.

Looking forward, we can expect more bad news as we enter earnings season - just after each quarter, publicly traded companies release their profit (or loss) reports.  Generally this is every January, April, July, and October.  Everyone expects Q1 will be bad, but the official numbers could be worse that expected as companies will likely use this as an excuse to throw out every bit of bad news they can find and blame it on the Coronavirus.  We call this a "Kitchen Sink quarter."  There is good news here, while it may drive equities down in the short run, they will have cleaner books and a good footing for stock gains later in the year.

So what CAN we do in today's volatile market environment? 

A) Don't try to time the market.  It's one thing to make tactical adjustments based on market inefficiencies, but selling to cash to avoid the bottom or trying to pick the bottom to buy is not investing, it's gambling.  If you have new capital to bring into the market, do it in stages.  We call this "dollar cost averaging"**.  Buy some now, knowing that it will probably go down in the short run, then buy some in a week or two, and again in a month.  In a few years, high quality investments you make now will look very cheap even if you bought them well before the bottom.

B) Focus on quality.  Long term investors see this as an opportunity to upgrade to stocks they have wanted to own but had not purchased because they were overpriced.  For example, my utility vehicle is an old 4runner (almost 20 years old now).  I would rather own a Land Cruiser.  They are a bit bigger and nicer; however, they sell for nearly three times as much.  So far, I haven't felt it was worth the additional cost to upgrade.  But, maybe now the price is right.

*Chart from CNBC.com and WTI historical data according to Macrotrends.net
**Dollar-cost averaging does not guarantee that your investment will make a profit, nor does it protect you against losses when stock, or bond prices are falling. 

Here is a link to Wednesday's PCIA research call, and here is a link to this Friday's upcoming call.

3/30/2020 - For all my clients that own small businesses, the following resources may be very useful right now:

The Forbes article by Finance Contributor Brian Thompson is very informative about the structure of the CARES Act (federal Coronavirus stimulus package) support for small businesses.  The article breaks down the available aid in two categories:

• EIDL
  • CARES Act allots $10 Billion - "The Small Business Administration’s (SBA) Economic Injury Disaster Loans (EIDLs) are the first line of support.  These loans aren’t new...  However, this is the first time a virus or pandemic event has been defined as a disaster...  businesses in every state and territory are now eligible to apply for Economic Injury Disaster loans"  The CARES Act expands the loan provisions as follows:
    
  • Standard Features -
    • Loans are up to $2M
    • Term is 30 years
    • Interest rates are 3.75% for small businesses and less for non-profits
      
    • First month’s payments are deferred a full year from the date of the promissory note. 
  • New Features:
    • Approved solely based on an applicant’s credit score (not repayment ability and no tax return is required).
    • Prior bankruptcy doesn’t disqualify you.
    • EIDLS smaller than $200,000 can be approved without a personal guarantee. They are also not requiring real estate as collateral and will take a general security interest in business property. 
    • Borrowers can receive $10,000 in an emergency grant cash advance that can be forgiven if spent on paid leave, maintaining payroll, increased costs due to supply chain disruption, mortgage or lease payments or repaying obligations that cannot be met due to revenue loss.  Applicants can get the emergency cash even if they don’t qualify for additional funds.
      
    • It expands access to sole proprietors or independent contractors, as well as tribal businesses, cooperatives, and ESOPs with fewer than 500 employees and all non-profits including 501(c)(6)s.
    • Waives the requirement that you be unable to obtain credit elsewhere. That means you can apply even if you already have a credit line.
    • You have to have been in business by January 31, 2020 to qualify.
    • There is no definitive timeline from application to approval on these loans, and there will be a lot of demand, so apply as soon as you can!
      
  • You apply for these loans directly through the SBA at www.SBA.gov/disaster.  There are no loan fees, guarantee fees or prepayment fees.
•  Paycheck Protection Program
  
  • CARES Act allots $350 Billion - "The CARES Act’s Paycheck Protection Program Loan Guarantee offers another source of help.  Under this program, the SBA backs small-business loans through local lenders...  they currently work with 1800 lenders and plan to expand that given the anticipated demand. "
  • According to the WSJ - Small Business loans are to start Friday
    
  • Details:
    • Have to be in operation before February 15, 2020.
    • Self-employed, sole proprietors, freelance and gig economy workers are also eligible to apply
    • Loans are given up to a maximum of the lesser of $10 million, or 2.5 times the average monthly payroll costs – including wages for employees making under $100,000, as well as expenses for paid sick leave, healthcare and other benefits -  during the 1-year period before the date on which the loan was made. 
    • The maximum interest rate under this program is 4% 
    • The loan term is up to 10 years
    • No personal guarantee or collateral is required for the loan
    • Payments are deferred up to six to 12 months 
    • Part of this loan may be forgiven and not counted as income to you, if it’s spent during the first eight weeks on operating expenses. Loans are forgiven when the proceeds are used for any of these costs:
      • Payroll costs, excluding prorated amounts for individuals with compensation greater than $100,000
      • Rent pursuant to a lease in force before February 15, 2020
      • Electricity, gas, water, transportation, telephone, or internet access expenses for services which began before February 15, 2020 
      • Group health insurance premiums and other healthcare costs.

The SBA also offers other information and programming at www.sba.gov/coronavirus. 

3/29/2020 - As suspected, the pre-stimulus enthusiasm was tempered a bit after signing.  Post-signing, the market was faced with two days of heavy selling and the weekend ahead*; the S&P encouragingly held on to much of its post-bottom gains - ending the week up nearly 14% (off from the high of up nearly 19% intraday).

*A lot of news can happen over a two day weekend and short term traders to sell before close on Friday.

It is truly remarkable how adaptable humans are as a species, and especially those of us privileged enough live in The United States of America.  The changes in day to day life, and expectations for the near term future, have altered dramatically for many Americans over the last couple weeks.  While there is still a tremendous amount of financial and economic uncertainty, people are already becoming comfortable with new routines and finding ways to thrive under sometimes very adverse conditions.  It feels like the country is rapidly moving past panic mode and beginning to settle in to the new reality.  To me this signals the next phase in the evolution of socially disruptive events - acceptance - and hopefully we are past the toilet paper hording stage.  We can only panic for so long before we fatigue and the adrenaline wears off, at that point we have to slow down.  Normally we will begin to see the market become more immune to day-to-day news and get a foothold in rationality.

A family friend, Peter Hessler, has written a fascinating article scheduled to be published in the print edition of the The New Yorker tomorrow titled "Life on Lockdown in China - Fourty-five days of avoiding the coronavirus."  The article details life living in a high-rise apartment building, in a densely populated city not far from Wuhan, with two nine year old daughters.  "Masks were required, and they made it easier for people to ignore one another."  I hope you take the time to read (or listen - podcast version is available) to his article.  While social distancing may physically separate us, it is my prayer that is brings us closer together intellectually and emotionally.

https://www.newyorker.com/magazine/2020/03/30/life-on-lockdown-in-china

I want to reiterate that the pandemic is not yet close to being under control in the US.  We continue to see acceleration in the number of new cases each day (see chart below).  Certainly some of this is likely due to increased testing; however, it is clear that the Trump administration and it's departments (CDC and it's parent Health & Human Services) are a long way from controlling the spread of this outbreak.  I think it is important to consume a broad range of news and opinions, and this analysis by German Lopex on Vox "The Trump Administration's botched coronavirus response, explained" does a pretty good job (albeit from a rather left-leaning source) of summarizing concerns voiced by more mainstream outlets including Fortune and CNBC.

"When Bolton became Trump’s national security adviser in 2018, he quickly moved to disband the White House National Security Council’s Directorate for Global Health Security and Biodefense... Then, that May, Bolton let go the head of pandemic response, Rear Adm. Timothy Ziemer, and his global health security team...  The cuts, coupled with the administration’s repeated calls to cut the budget for the Centers for Disease Control and Prevention (CDC) and other public health agencies, made it clear that the Trump administration wasn’t prioritizing the federal government’s ability to respond to disease outbreaks."

Let's end this post on a positive note.  Abbott Laboratories is unveiling a coronavirus test that can tell if someone is infected in as little as 5 minutes, and is so small and portable it can be used in almost any health-care setting.  The medical-device maker plans to supply 50,000 tests a day starting April 1.  Full article on Bloomberg here.

3/26/2020 - We are in the midst of an unprecedented time; investors have a lot of questions. In light of the rapid pace of new information and investors' desire to receive up-to-date information, PCIA is offering a series of short, easy-to-understand webinars that will help investors to know there is a team of people monitoring the markets and their investment accounts.

Individual investors, retirement plan trustees and retirement plan participants are encouraged to join in the upcoming semi-weekly webinars.

Market Update Webinars - Making Sense of All the Volatility

3/25/2020 - The market followed yesterday's historic rally (largest Dow single day gain since 1933) with another up-day.  Keep in mind that most of this rally has been driven by anticipation** of the Federal Stimulus bill, and may not represent the bottom.  There are still many weeks of increasing infection rate and death totals ahead of us.  I don't think we can really hoist the victory banner until we have more clarity surrounding the economic impact of social-distancing and self-isolation, and start to see the daily new infection rate show a consistent pattern of decline.

This brings up questions about the longer term social impacts of this pandemic.  For example, the terms above "social-distancing" and "self-isolation" are now common household words.  Gen Z children will always remember "the spring when...", today's toddlers will likely go many months without play-dates, library readings (do they still do that?), and tumbling classes.  As with all prior economic disruptions, there will be winners that fill the gap left by losers.  Cruises may become less popular (fewer passengers may lead to fewer operators); however, the demand for remote work and distance learning technologies (and home office supplies) may grow.  Just as Amazon has replaced many big box stores, and auto-parts stores replaced buggy-whip manufacturers.

When I'm asked how the market will ever recover from this (or any bear market for that matter), I am fond of the quote: "The average long-term experience in investing is never surprising, but the short term experience is always surprising" - Charles Ellis.

**This is a great example of how the market moves on anticipation.  By the time you and I read about things in the news, someone else has already come to the same conclusion, beat us to the trade and the market has already moved.  With this in mind, we need to focus on investing for long term economic growth.

Today's PCIA Market update call reviewed the major parts of the stimulus bill, and put the recent pull back in perspective - Dow is nearly flat with Jan 2019 and some categories of bonds are up for the YTD (helping offset losses in other asset classes like stocks, real estate and gold).  Stay tuned for more updates and Friday's call.

*market data via Yahoo! Finance

3/25/2020 - CNN is reporting that the White House and Senate leadership reached an agreement Wednesday morning at 1am to pass a $2+ trillion stimulus package.  The full details have yet to be released, but it is believed to include $250 billion set aside for direct payments to individuals and families, $350 billion in small business loans, $250 billion in unemployment insurance benefits and $500 billion in loans for distressed companies.

https://cnn.it/2xqkk7X

3/24/2020 - Stocks rebounded this morning, from a three-year low, as investors hoped U.S. lawmakers were close to an agreement on a stimulus bill after Democrats blocked the nearly $2 trillion package over concerns about the oversight of the $500 billion stabilization fund.  The 2008 Wall Street bailout is serving as a cautionary tale of rushing to sending federal money to private corporations with unpredictable consequences.

https://www.cnbc.com/2020/03/23/dow-futures-up-more-than-200-points-as-senate-debates-over-virus-bill.html

"At the heart of the impasse in the Senate has been a $425 billion fund created by the bill that the Federal Reserve could leverage for loans to assist broad groups of distressed companies, and an additional $75 billion it would provide for industry-specific loans. Democrats raised concerns that the plan would not require sufficient transparency or enough guardrails around the funds to make sure companies do not use them to enrich themselves or take government money and lay off workers. They also argued the measure as written by Republicans would give Mr. Mnuchin too much discretion to decide which companies receive aid, calling the proposal a “slush fund” for the administration."

https://www.nytimes.com/2020/03/23/us/politics/stimulus-package-for-coronavirus.html?campaign_id=9&emc=edit_NN_p_20200324&instance_id=17020&nl=morning-briefing&regi_id=63289552&section=topNews&segment_id=22704&te=1&user_id=4f63537ddfc39ac241e0b7bdcd708677

“You want a pat on the back for sending 400 ventilators?  What are we going to do with 400 ventilators when we need 30,000 ventilators? You’re missing the magnitude of the problem, and the problem is defined by the magnitude.” Gov. Andrew M. Cuomo

The governor said New York's case count was doubling every three days and the state now projects that it may need as many as 140,000 hospital beds to house virus patients, up from the 110,000 projected a few days ago. As of now, only 53,000 are available.

After weeks of pleas from state and local leadership, the Trump administration finally plans to use a wartime production act for the first time on Tuesday and mandate the production of 60,000 coronavirus test kits.

And in sporting news, the Tokyo summer Olympics will be delayed until 2021.

https://www.nytimes.com/2020/03/24/world/coronavirus-updates-maps.html?campaign_id=9&emc=edit_NN_p_20200324&instance_id=17020&nl=morning-briefing&regi_id=63289552&section=topNews&segment_id=22704&te=1&user_id=4f63537ddfc39ac241e0b7bdcd708677

3/22/2020 - Johns Hopkins is leading a national effort to use antibodies from recovered COVID-19 patients like temporary immunization and treatment of those that are already sick.

“A new vaccine might be at least 12 to 18 months away though new drug treatments will likely come sooner... the stop-gap measure of using plasma (serum) from the blood of survivors until a vaccine and antiviral medications are available... clinical trials  could begin in 3–4 weeks...”

”When you recover from many viral diseases, you have in your blood what are called neutralizing antibodies. These are antibodies that kill the virus. Once you recover, the plasma can be taken from donors. It’s very safe. It's the same thing as using a blood donation except they don’t take the red blood cells, they take the liquid. They take the plasma. It is itself a drug... it can be used for prevention of infection for people who are being exposed or it could be used for therapy for those who are sick.  It’s not a vaccine. Think about it as the administration of a protein, it’s a liquid that is given to people that gives them immunity.”

”Donors have to donate blood that then has to be processed before using it. I think that it is not going to help the first ones who get sick, but I think as we as we get into trouble in April, May, June, that is that this may be coming online.”

”In fact, the Chinese sent 90 tons of plasma to Italy.”

https://www.globalhealthnow.org/2020-03/covid-19s-stop-gap-solution-until-vaccines-and-antivirals-are-ready

3/21/2020 - Columbia University researchers say the number of undetected cases is 11 times more than has been officially reported.

“they offer a stark warning: Even if the country cut its rate of transmission in half — a tall order — some 650,000 people might become infected in the next two months.”

https://www.nytimes.com/interactive/2020/03/20/us/coronavirus-model-us-outbreak.html?&te=1&nl=morning-briefing&emc=edit_nn_20200322&campaign_id=9&instance_id=16976&segment_id=22540&user_id=4f63537ddfc39ac241e0b7bdcd708677&regi_id=63289552_nn_20200322

3/20/20 -Confirmed cases surpasses 15,000 in the US according to the NY Times.  More details on their website including a county by county listing of cases (10 in Shelby county as of this writing)

https://www.nytimes.com/interactive/2020/us/coronavirus-us-cases.html

Also of interest is the exponential growth of the number of new infections each day (see chart).  I think it seems inevitable that we will start to see comparisons between the US response and that of other countries that have more successfully "flattened the curve", which could put more pressure on the Trump administration.

https://www.nytimes.com/interactive/2020/03/19/world/coronavirus-flatten-the-curve-countries.html

PCIA hosted another Market Update conference call today.  Here is a link to the recorded session: https://attendee.gotowebinar.com/recording/7290548648656027393

Here are some of the highlights:

3/20/2020 - Yesterday was a relatively calm day by recent standards; however, by historical standards it was very high volatility - we saw the S&P 500 swing between -2% early in the day, and rising as high as +4% in the afternoon closing about 1/2% in the black.

Confirmed cases in the US rose above 10,000 reflective of both increased spread, but also increased testing.  The actual number of infected individuals is widely expected to be several fold of the confirmed cases (some estimates were as much as 50,000 a week ago and could be over 100,000 now).  A big part of the issue we face as a nation is that the limited availability of testing is preventing the CDC's from accurately tracking outbreak clusters and implementing targeted measures to contain the spread.  The administration currently recommends that only those with symptoms be referred for testing (due to limited testing capacity); however, it is well documented that younger people can have less obvious symptoms and non-symptomatic carriers often spread the disease further than the sick (as they don't feel sick, so there isn't an obvious reason to self-quarantine).  See Mary Mallon.

The Governor of California has issued an order for citizens to stay at home - All dine-in restaurants, bars and clubs, gyms and fitness studios will be closed, according to the order. Public events and gatherings are also not allowed. Essential services will stay open, however, such as pharmacies, grocery stores, takeout and delivery restaurants, and banks.  Locally, the Memphis Mayor has ordered bars and gyms to close, and restaurants to close dining areas.

https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/cases-in-us.html
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5830799/
https://www.wmcactionnews5.com/2020/03/19/memphis-mayor-declares-civil-emergency-ordering-restaurants-bars-gyms-close/

3/18/2020 - Harvard published some updated resources today.  I thought this was especially important:

”coronavirus can survive up to four hours on copper, up to 24 hours on cardboard, and up to two to three days on plastic and stainless steel. The researchers also found that this virus can hang out as droplets in the air for up to three hours before they fall. But most often they will fall more quickly.”

https://www.health.harvard.edu/diseases-and-conditions/coronavirus-resource-center

3/18/2020 - Here is a link to a recording of a webinar that was hosted by Prime Capital Investment Advisors this morning (featuring Christopher M. Bouffard, CFA and Matthew J. Eickman, J.D., AIF^®):

https://attendee.gotowebinar.com/register/8511750924774949121

Some key slides:

For a link to upcoming webinars, email me at rik@pierfa.com

3/18/2020 - Here is the latest report on the spread of COVID-19.  It is my opinion that the most significant news we received yesterday is the support from the administration and large banks to keep the markets open throughout this crisis.  Access to capital will go a long way to stabilize the market and soothe the panic to get liquid.

3/16/2020 - Today is a reminder of the power of uncertainty.  The equities market recorded the worst day since Black Monday (1987) - the S&P 500 dropped 12% despite the massive monetary stimulus package announced by the Fed.

In my assessment, it's NOT that the market expects a horrific recession (see chart) due to the impact of COVID-19, but rather a general fog is obscuring the future; How and when will the pandemic be resolved?  In turn, that uncertainty creates a strong desire for security and the sharp drop can force further selling.  I think this perspective is reinforced by the sell down in assets across the board (not just stocks) this includes gold, real estate, and even many areas of the bond market.  Just like toilet paper, investors are seeking a feeling of security at any cost.

According to Goldman Sachs research note from yesterday:

"we now expect real GDP growth of 0% in Q1 (from +0.7%), -5% in Q2 (from 0%), +3% in Q3 (from +1%), and +4% in Q4 (from +21⁄4%), with further strong gains in early 2021. This takes our 2020 GDP forecast down to +0.4% (from 1.2%)

As you can see from both Goldman and CNBC's survey, the expectation is that GDP declines will be quickly made up by the end of the year, and we will return to growth mode in 2021.  That perspective does not support the low asset levels we are seeing today.  This reminds us that even if we do technically have a recession, not every recession is as bad as the 2008 financial crisis.  DB Global Research points out: 

“The current slowdown is not driven by an endogenous build-up of an imbalance in the economy but rather by an exogenous shock that literally came out of the blue. This argues for the current slowdown to be short and deep.”

I expect a strong bounce in the morning as futures market have already hit limit-up.  Again, this may not be the bottom, as we have many weeks or months of bad headlines ahead of us.  However, keep in mind that the bottom is when things seem the scariest, and we begin to "climb the wall of worry" when the fog starts to clear, not when the economy is better.

In response to all the analysts who think the Fed's actions are ineffective, I like how RW Baird's Market Strategist put things:

"Every one of you with your godawful Fed takes need to stop. No they aren’t curing the disease, No they aren’t trying to get the stock market to go up. No they aren’t 'out of bullets.'  They are making sure the financial system functions to get us thru this. That’s it."

To close, I found some unique and insightful information in Lazard's memo published on the 13th, and would echo their opening comment:  "Naturally, our first concern is with the human toll this outbreak has taken and may yet take. We are particularly concerned for our employees and clients around the world, some of whom live and work in the affected regions."

• "the pandemic highlights the downside of depending on other countries for medical supplies.... In the US, we should have learned about this vulnerability when Hurricane Maria"
• "The latest projections assume each infected person transmits the virus to 2.5 others. If this is accurate, it implies that 60% of the population could ultimately be infected"
• "We currently estimate that about 15% of people who contract it require hospitalization and one in three of those require intensive care."
• "the entire US healthcare system has the capacity to treat 434,000 coronavirus patients, of whom 21,700 would need ICU services. While this sounds substantial, the number of infections could already amount to well over 10,000. If the currently assumed doubling rate is correct at six, i.e. it takes six days to double the case numbers, the US could reach 434,000 cases in 33 days. If the doubling rate is 5 days, the US would reach 434,000 cases in just over 27 days."
• "To the extent this situation transpires in the US, healthcare rationing is likely to bedevil the system in the months ahead. In an environment in which confidence in government and other institutions is already at multi-decade lows, and in which desire for radical political change has been elevated, it is easy to imagine COVID-19 taking the US to places as yet unseen in terms of politics and policy."
• "even though China is purportedly ramping up economic activity quickly, the global supply chains are still deeply dysfunctional, with ports and freighters poorly positioned to move goods."
• "In the US, recession also appears increasingly likely, especially with the added pressures from the oil price war, and has now become the base case scenario."
• "The biggest wild card for the US is the possibility that warmer weather might help mitigate transmission. The virus is a novel virus, and we have no evidence to forecast effects of temperature and humidity on transmission... If the US is "lucky” and transmission does slow in spring, the economic hit could be limited. That does not mean the US will escape unscathed. The virus could well mutate and return in the fall, as history has shown viruses often do."
• "At best, this might leave us with a near-miss recession in the US and a shallow recession in Europe. To be clear, there is nothing dire about real GDP slipping from 0.2% to -0.2%."
• "In sum, now is the time to brush off the recession scenario. It is also a time for investors to carefully inspect each security in their portfolios to ensure they understand vulnerabilities around supply chains, demand drivers, variable versus fixed cost bases, balance sheet leverage, etc. This is also a time to take advantage of potential dislocation opportunities and upgrade the quality of holdings. So far, the market has not discriminated sufficiently between high- and low-quality names in our view. If anything, high-quality liquid names have sold off more than expected recently, which creates meaningful potential opportunity. The intrinsic value of many high-quality names has not changed materially. If that is the case, future cash flows are on sale. For other companies, the outlook has changed materially, and the market is repricing accordingly. We believe the keys to navigating this turbulence successfully are security-specific analysis and a thoughtful approach to both tactical and strategic asset allocation."

https://www.lazardassetmanagement.com/us/en_us/references/announcements/coronavirus

3/16/2020 - Quick note, the market is set to open lower this morning as I suspected on Friday.  Despite all the scary news about the virus, Goldman's GDP estimates are still in the territory of flat for the calendar year, supporting my beliefs on equity valuations.

"Stock futures were down sharply on Monday even after the Federal Reserve embarked on a massive monetary stimulus campaign to curb slower economic growth amid the coronavirus outbreak.

Stock market futures hit “limit down” levels of 5% lower, a move made by the CME futures exchange to reduce panic in markets. No prices can trade below that threshold, only at higher prices than that down 5% limit."

https://www.cnbc.com/2020/03/15/traders-await-futures-open-after-fed-cuts-rates-launches-easing-program.html

"Jan Hatzius, Goldman’s chief economist, lowered his first-quarter GDP growth forecast to zero from 0.7%. The economist also sees a 5% contraction in the second quarter, followed by a sharp snapback for the remainder of the year."

https://www.cnbc.com/2020/03/15/goldman-sachs-sees-zero-us-economic-growth-as-the-coronavirus-spreads.html

3/14/2020 - Yesterday's bounce of 9.29% in the S&P 500 was a relief to many; however, I'm not convinced that this is the all clear - now is a time for cautious optimism:

3/13/2020 - Interesting article by Nina dos Santos today: What does Britain know about coronavirus that the rest of Europe doesn't?

The British government has repeatedly said it does not believe that banning large-scale gatherings and closing schools -- like Italy, France, Germany and Spain have done -- would be effective in preventing the spread of the disease...  The reason the UK has held off stricter "social distancing" measures appears to be rooted in the government's prediction that the outbreak may not peak until 14 weeks from now -- and that people will not be willing to drastically alter their ways of life and stick to the new rules for over three months, so there's little point imposing more restrictions just yet... Government ministers claim their decisions are being led purely by science. That science, they say, currently suggests that it would be beneficial for the country to build up some sort of herd immunity to the novel coronavirus strain in the long run. In short, authorities do want some Britons to get the bug, especially since for many, its symptoms will not be particularly debilitating.

https://www.cnn.com/2020/03/13/uk/uk-coronavirus-response-boris-johnson-intl-gbr/index.html

3/12/2020 -Today the market recorded several headline worthy milestones in the continuing Coronavirus pandemic panic.  A few that stand out are:

3/11/2020 - Today's update is courtesy of Chris Bouffard, CFA - Managing Director, Wealth Management at Prime Capital Investment Advisors.

Key points:

• While coronavirus may be new, market downturns and volatility are not.
• Bottoming is a process, it important to keep a long-term perspective and not make emotional decisions.
• Short-term market volatility is the price of admission to achieving long-term market returns.
• Diversification helps mitigate the risk of relying on any single investment, helps lower portfolio volatility, and helps to temper emotions during market turbulence.
  

Market disruptions occur frequently and one can always find a reason to sell. Markets have encountered shocks and crises in the past ranging from political & geopolitical events, assassinations & wars, epidemics & pandemics, and natural disasters. The good news is that markets have always come back. The bad news is that it can sometimes take a while to come back… and the waiting can create a lot of anxiety. It is bad enough when markets get hit by an exogenous shock, it’s worse when it is hit by more than one. We were already dealing with the coronavirus epidemic and then Monday (3/9) added an oil shock to the mix. Now the markets, and investors, have to go through the process of digesting and recovering from those impacts.

Bottoming is a process, it is almost never a one-and-done phenomenon. This is especially true after record-long bull markets and from record high levels (which also came with very few pullbacks). It is improbable to have as much market dislocation as we just experienced (in volatility, in yields, in currencies, in lost market capitalization, and in business disruption) without weeks of accompanying back-and-forth buy-versus-sell battles, that will bring bouts of forced selling, tests of technical levels, and sharp shifts in sentiment. That is what must happen for markets to find a bottom and what they are now working through.

Importantly, and to reiterate, this is not a new process. As mentioned above, it occurs regularly. On the following page is a chart that is used frequently to demonstrate that in any given year markets can typically fall by double digits. There are several observations worth noting about this exhibit.

• As the subtitle states, the average intra-year downturn is -13.5%, yet annual total returns were positive in 25 of 31 years, or 81% of the years.
• Of the 31 full calendar years depicted, 16 had at least a double-digit drawdown (or 52% of years).
• The S&P 500 price index is down -18.8% in 2020 through Monday, March 9th. The average annual intra-year price decline is -14% and in 8 of the last 31 years (about 25% of them) the intra-year loss has been as bad or worse than current levels.
• Note that on a total return basis (including dividends) the S&P 500 is down -15% year-to-date.

Here is another, even longer-term perspective. Using data for the S&P 500 data going back to 1950, Capital Group identified the frequency and average duration of various levels of market declines. Again, the takeaway is that we’ve been here before and markets have bounced back from crises in the past.

Empathy, not just facts. The purpose of providing this material is not to drown you with facts and statistics. Rather, it is intended to add perspective – to help better cope with the current market gyrations. Facts alone won’t suffice, but with investors getting bombarded with alarming headlines there is a need for some counterbalance to control anxiety and emotional reactions. Here’s a sampling of some headlines shouting at the public after Monday’s session:

Headline Risk: The Sky is Falling!

Reuters Wall Street clobbered as crude plummets, virus crisis deepens
CNBC Dow sinks 2,000 points in worst day since 2008, S&P 500 drops more than 7%
NYT Markets Spiral as Globe Shudders Over Coronavirus
WSJ Stocks Fall More Than 7% in Dow’s Worst Day Since 2008
USA Today Dow plummets 2,000 points, oil prices drop as global recession concerns mount
Bloomberg ‘Trying Not to Panic’: The Collapse in U.S. Markets Spared No One

The benefits of diversification. This is a perfect time for a friendly reminder that a properly diversified asset allocation is, by design, down less than the U.S. equity indices cited in these headlines. Long-term investing is a journey that will inevitably, and necessarily, be bumpy. But using a diversified portfolio should help smooth the ride. Through Tuesday, March 10, the S&P 500 Index was down nearly -15% year-to-date, but a typical 60% equity and 40% bonds diversified portfolio was down about -7% -- less than half of the S&P 500.

Investors behaving badly. There are well-publicized statistics from firm’s like Dalbar and Morningstar that show the investors’ returns consistently trail actual investment returns. In other words, because of cognitive biases and irrational (emotional) decision making, investors make detrimental behavioral-based investment choices that tend to harm their long-term investment returns. Emotional reactions to unexpected events, like a new epidemic or a market decline, are perfectly normal. It is important to acknowledging those fears and anxieties, while also recognizing the context of the bigger (longer-term) picture. Doing so can help ease the worries and provide reassure to stay the course.

And make no mistake, there is plenty of fear from these market gyrations. There are plenty of metrics that show conditions are hitting the kinds of extremes that mark capitulation. Again, bottoming is a process, so it may not be the capitulation, but it is certainly signaling some capitulation. The CNN Money Fear & Greed Index CNN's tracks seven indicators of investor sentiment. Currently, it is at a level of 3 (out of a total 100), which indicates “Extreme Fear” and each of the seven components are at “Extreme Fear” levels.

The Bottom Line

The bottom line is that periods of short-term market volatility is the price of admission to achieving long-term market returns. Given how ugly markets have been, investors may not realize that Monday, March 9, marked the anniversary of the longest bull-market in history as it turned 11 years old. The S&P 500 Index was at 676 on March 9, 2009 and now stands at 2,882 after the close on March 10, 2020. Even after Monday’s decline dropped the index to a -19% drawdown, the bull market still had a total advance of 326%, or 14.0% annualized through March 10. But those returns were only achieved if investors were invested on March 9, 2009, and stayed invested through several other material drawdowns. Those include the fourth quarter of 2018, which is still the largest downturn of this 11-year bull market, just missing the -20% correction mark that would have ended the bull market. That Q4-2018 downturn was a process too, it took 65 days to hit that bottom and 81 days to recover. To achieve those long-term returns requires patience and fortitude through short-term volatility.

Christopher Bouffard, CFA
Managing Director, Wealth Management

The preceding commentary is (1) the opinion of Christopher Bouffard is not necessarily the opinion of PCIA, (2) is for informational purposes only, and (3) should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.

3/10/2020 - We have witnessed extraordinary moves in the financial markets recently.

On Monday, the Dow Industrial Average lost over 2,000 points, as Coronavirus fears continued to worry investors. At the same time, oil prices lost nearly 30 percent, on news that Saudi Arabia was dropping crude oil prices and raising production as well. Meanwhile, the 10-year Treasury bond yield touched an all-time low of 0.318 percent during the trading session, as unnerved investors looked for some stability.¹

In times like this, I frequently hear that some find it difficult to stay committed to an investment program when fear has gripped the financial markets.

But for me, a quick look at recent history helps me keep these events in perspective.

Remember when the trade dispute with China ramped up back in February 2018? In just six trading days, stock prices had undergone a rollercoaster ride on their way to a 10-percent market correction. On February 8, 2018, CNBC reported that the Dow Industrials traveled 22,000-plus points over the course of February’s first full week of trading, due to trade-related fears.²

How about the 4th quarter of 2018? On October 10 of that year, the Dow saw an 800-point drop, largely due to rising interest rates and global economic concerns. And who can forget the holiday market trading two months later? It was a breathtaking event as the Dow lost over 600 points on Christmas Eve, then soared 1,000 points the day after Christmas.^3,4  

In the past few weeks, I’ll admit that I’ve done a few “double takes” at my computer screen, as we’ve watched major swings in stock prices and movements in the bond and crude oil markets.

But just like always, I am here to help you and your family answer any questions that might surface. Whatever decisions you’re considering, I’d be honored to support you through them. Reach out to me anytime.

-Rik Ditter, RFC®, CMFC®

^{All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.}

<sup>1. CNBC.com, March 9, 2020
2. CNBC.com, February 8, 2018
3. CNBC.com, October 10, 2018
4. CNBC.com, December 25, 2018</sup>

3/10/2020 - This analysis is an excerpt from a letter sent to clients by, and courtesy of, my esteemed college Eric Schoenfeld, Managing Director (PCIA Virginia Market):

With developing cases of Coronavirus and heightened market volatility, the concepts of personal meaning and context are more important than ever. Current volatility and unpredictability highlight why we have worked to develop and evolve your personal financial plan to fit your needs and achieve your goals.

Three material conditions lead us to believe that once Coronavirus reaches containment, the economy will be well poised to rebound.

• The economy was strong before the Coronavirus outbreak escalated. February posted stronger than expected job gains, the unemployment rate is back at a 50-year low and housing has been solid.
  
  
• Historically, medical epidemics (like SARS) tend to be transitory in nature. Coronavirus does not pose risk to infrastructure or structural damage on the economy, as opposed to other geopolitical events, like war or natural disasters.
  
  
• The Federal Reserve (“The Fed”) has stated and is taking action through monetary and fiscal stimulus to 1) boost confidence (business and consumer), 2) ease financial conditions, and 3) facilitate a quicker demand response when the outbreak burns out and supply chains are restored.
  

Please rest assured that whatever the reason, be it Coronavirus, another surprise interest rate drop, tornadoes in the night, political unrest, etc., my promise to you is that I will always work hard and do my best for you.

Sincerely,
Eric

3/9/2020 - Another scary day in the stock market, with the market hitting the 7% circuit breaker shortly after open and holding between 5-7% decline through the trading day.

Russian and Saudi tensions resulted in the failure of OPEC to extend production cuts (oil dropped nearly 20% today and is down over 50% in the last two months) and has the stock market acting as if we're heading into a full-blown recession and skirting bear market territory. 

The best analysts estimates project COVID-19 panic will cause flat earnings growth this year.  We have already seen a drop in new cases in China, singling the pandemic is beginning to wane in Asia, and many retailers are starting to reopen there (see Apple, IKEA & Disney).  As with most market disruptions, this is a great opportunity to make strategy buys for those in the accumulation phase, and for those in the distribution phase, this too shall blow over in time.

• Three dips a year of -5% or more annually.
  
• A moderate correction (-10% or more) annually.
  
• A severe correction of -15% or more every 4 years.
• One bear market (-20% loss or more) every six years.

We have now gone 11 years since the last bear market.  While a correction or bear market is never "overdue", we need to remember that statistically, they are a normal part of being a long term investor.  As I am fond of saying, we shouldn't hope the market doesn't crash, we should plan on it!

2/27/2020 - The following market update is courtesy of the research team at Prime Capital Investment Advisors.

With the Coronavirus continuing to spread outside of China, risks continue to rise. This week has witnessed the Dow Jones Industrial Average (DJIA) and S&P 500 drop the most since February 8, 2018. We have also witnessed the VIX (volatility index – also known as the fear index) spike to the highest levels since February and December of 2018. The market angst has persisted for several weeks, with momentum to the downside picking up as the Coronavirus spreads around the globe. The DJIA is down nearly 2,000 points over the last two trading days, delivering the worst two days of in the US equities markets since 2015. Also, sending certain pockets of the market towards, or into, correction territory (sell-off greater than 10%); see Technology stocks.

While the peak of the epidemic and global economic fallout remains relatively unknown, it’s clear the prolonged impact of the COVID-19 (Coronavirus) will continue to disrupt markets and the global economy for the foreseeable future. Yes, similarities between COVID-19 and the 2003 SARS outbreak exist, but it appears the impact of the Coronavirus will be more significant. Not only is China significantly larger than they were 17 years ago, but they are more integrated into the global economy than ever before. We’ve already seen global tech giants like Apple (AAPL) warn of both demand and supply chain disruption as a result of COVID-19, and while AAPL announced yesterday morning they have reopened about 50% of the stores in China, the closure of the second largest economy will be sure to have greater impact than initially predicted.

While not receiving much press, we continue to monitor the yield curve. Over the past several weeks, we’ve continued to witness investors flee equities, the flock to the safety of bonds, causing yields to plummet, and the yield curve to flatten. The spread on the 2/10 (2-year US Treasury to the 10-year US Treasury) is back around 0.13% (or 13 bps); levels not witnessed since the yield curve inverted last August. When the yield curve is inverted, the yield on a 2-year US Treasury bond is greater than the yield on a 10-year US Treasury bond, which has historically indicated with a high probability that a recession may be on the horizon. Any further compression, or inversion, will sure to stir the recession panic even further; consuming every other headline like witnessed last August. Increased recession panic caused by another yield curve inversion would only serve to perpetuate the market selloff. Not to mention, with each passing day the virus infiltrates and infects the global economy, the odds of central bankers coming off the sidelines to implement aggressive monetary policy to ‘save the day’ increases.

The rapid outbreak of the Coronavirus is a blunt reminder that unexpected events can transpire at any time. It’s these times where portfolio diversification is imperative. As of now, while the market will most likely continue to washout in the immediate term, we are under the belief once some stabilization is achieved, the market is likely in store for a ‘V’ recovery. Our goal is removed emotion from our decision making process, so we strive to never make knee jerk reactions, and continue to closely monitor the virus’ impact. We continue to assess events as they continue to unfold and we learn more; looking for potential opportunities to make portfolio adjustments for clients if warranted.

While periods of sharp selling and investor angst is hard to stomach, and causes further anxiety, we urge investors to keep a long-term perspective, and avoid panic selling; only exacerbating the sell-off and potentially causing more harm to long-term investment objectives by missing a potential rebound in global markets. As previously mentioned, unexpected risks like the COVID-19 virus outbreak are impossible predict, however, it’s also times like this that really highlight the value and benefits of our focus on diversification and quality. Over the course of the last year, we have continued to emphasize and implement a bias to quality, both through fixed income (bond) and equities (stocks) holdings, which we believe should hold up relatively well under the face of continued volatility and downward pressure; helping to minimize overall portfolio draw-down relative to overall equity markets.

The preceding commentaries are (1) the opinions of Chris Osmond and Eric Krause and not necessarily the opinions of PCIA, (2) are for informational purposes only, and (3) should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.

1/31/2020 - The global markets sold off again today as the Coronavirus death toll mounts and the outbreak continues to stretch across the globe.  With the selloff in equities, investors flocked to traditional safe investments like US Treasuries, gold and even Bitcoin.

Below is a comparison to the SARS epidemic back in 2003, which saw the market fall more than 5.5% after the virus was discovered in late February of 2003, until the WHO (World Health Organization) issued the first Global SARS alert on March 12^th of 2003.  While the SARS epidemic lasted approximately six months, the market mainly reacted to the initial onset of the breakout; only to rebound after the WHO’s announcement. 

While the Coronavirus will mostly likely continue to consume headlines, and serve as a source of volatility for the foreseeable future, at this time, we feel the market is overreacting to the outbreak.  As such, at this point we do not believe this news warrants a shift in either our tactical or strategic positioning.  Rest assured that we will continue to monitor the developments very closely, and be ready to act should the situation escalate and warrant a change to our thesis. 

*Credit for the chart and SARS data goes to the PCIA research team.