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Kuby’s Commentary

Lockdown Countdown

Apr 13, 2020

Last Week:

According to the CDC’s website, the practice of quarantine began during the 14th century in an effort to protect coastal cities from plague epidemics. Ships arriving in Venice from infected ports were required to sit at anchor for 40 days before landing. This practice, called quarantine, was derived from the Italian words quaranta giorni which mean 40 days. I guess some things haven’t changed much in the last seven centuries. The Illinois shelter in place order became effective March 21 at 5pm, so hopefully we will be free to come ashore on May 1, which will be day 41 and also consistent with the Governor’s current edict.

Hang in there! As expected, more evidence of the economic fallout, combined with a continued ramp up in global coronavirus cases, has resulted in a 24/7 stream of disturbing headlines. There were 6.6 million new claims for unemployment, down slightly from a revised record 6.9 million during the prior week, but still a staggering number. By way of reference, the approximate range over the last decade was between 175,000 in a good month and 500,000 when the economy seemed more challenged. The number of daily infections and deaths from COVID 19 also continued to surge, but thankfully at a reduced growth rate.

A savvy friend of mine had suggested that the reduced growth rate in the spread of the virus was going to be the trigger for hedge funds and trading to flip from sellers to buyers. Looks like he was right, as during the holiday-shortened trading week, the S&P 500 climbed 12.1% and the Russell 2000 soared 18.5%. It was the best percentage gain for the stock market since October 1974, when it was emerging from a bear market that had sliced 45% off its value. As you can see in the graph below, it took another 18 months before the market recouped those losses and reached new highs. As they say, history doesn’t repeat itself, but it often rhymes. I think we would all enjoy that rhyme in 2021.

The yield on the Ten-Year Treasury moved up 14 basis points to 0.73%, while the dollar slipped around 1% and gold gained 6.3% to reach its highest level since early 2013. Crude oil declined almost 20% as the plan for a coordinated production cut ran into resistance.

This Week:

The first quarter earnings season kicks off in the coming week, and it’s not going to be pretty. Composite S&P 500 year-over-year earnings are now expected to decline -10.0% compared to the estimated earnings growth rate of 4.3% on December 31. If -10.0% is the actual decline for the quarter, it will mark the largest year-over-year decline in earnings for the index since Q3 2009 (-15.7%). It will also mark the fourth time in the past five quarters in which the index has reported a year-over-year decline in earnings. Most companies will probably withdraw guidance for the rest of 2020, as even predicting the upcoming quarter with any accuracy is impossible given the uncertainty over the timing of the reopening of the economy and the course of the virus. It is widely anticipated that Q2 2020 will be one of the worst quarters for the U.S. economy on record, with the restaurants, movie theaters, athletic stadiums, and retail stores all shuttered.

Retail sales and weekly jobless claims will be closely watched as they both show the direct hit of the virus shutdowns on the economy, but with analyst widely anticipating the worst retail sales decline in history the market likely has already priced in the bad news. The most important data will continue to be anything that shows the virus is plateauing, and the news over the weekend was somewhat encouraging in that regard. Evidence that the $2.3 trillion of authorized government programs is making its way into the hands of struggling businesses and individuals would also provide a welcome confidence boost.

OPEC + reached a historic deal to cut daily production by almost 10 percent after week-long contentious negotiations wrapped up over the weekend. Crude prices were relatively unchanged on Monday morning as the market questioned whether the cut will be enough to dent the massive global supply glut.

Final Thoughts:

Borrowing from the Grateful Dead, “I know the rent is in arrears, the dog has not been fed in years. It’s even worse than it appears, but it’s alright. We will get by. We will survive”

Keep breathing, but not on anyone. We will survive.

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