Big Decline On Wednesday
Stocks started the quarter on a sour note. S&P 500 fell 4.41%. If the market falls in April, that will be its 4th straight month of declines. We're not expecting a weak month because the uncertainty that is hurting the market will be lifted by the end of it. We will know more about earnings, Italy’s recovery, and America’s peak in cases by the end of April.
Earnings season will likely be fine for stocks because everyone expects weak results. That’s priced in. Italy will probably announce plans to reopen in May by the end of this month. That’s because the number of new cases per day is in a downtrend. Once the number of active cases falls for 2 weeks. Look for a reopening.
Wuhan is gingerly reopening. There was a report out from the U.S. intelligence agency that China lied about the number of cases it had. That would be considered bad news 5 weeks ago. It implies the growth in other countries has much longer to go. However, now many view it as good news.
It means despite Wuhan being decimated by coronavirus, it still is recovering. Even if America gets worse in the next 2-3 weeks, it will still be able to recover in 1-2 months. Its peak is important because it helps us determine when the recovery will start. There’s a huge difference between peaking on April 15th and April 30th.
A base case scenario is the situation starts getting better in New York in a week. Which, in turn causes investors to become more optimistic and buy stocks. Just like how they bought stocks after Italy’s crisis peaked.
$4 Trillion In Cash On The Sidelines
Technically, the term ‘cash on the sidelines’ doesn’t make sense because when someone buys a stock, there is always someone else selling it, leading to no change in cash. However, this term is used to describe the current situation. Especially because there has been an explosion of assets in money market funds. Some of this cash can go into risk assets when sentiment improves.
As you can see from the chart below, even though interest rates are near zero, there is almost $4 trillion in money market funds which is slightly above the peak in late 2008/early 2009. To be clear, this isn’t a buy signal. We'd expect more cash than the previous peak since the economy is larger.
On the other hand, that’s not to say we aren’t near peak pessimism. Percentage of bears in the AAII investor sentiment survey has been above 50% for 3 weeks. CNN fear and greed index fell 3 points to 22 which is extreme fear.
Wednesday’s Big Selloff
This wasn’t a big selloff by March’s standards, but some pockets of the market were hammered. VIX was up 3.52 to 57.06. Nasdaq fell 4.41% and the Russell 2000 fell an enormous 7.03%. Carnival Cruise stock fell 33.18% despite its recent capital raise. Obviously, it needs to pay very high rates for an investment grade firm. But at least it will be around for the next 6 months. If next summer is closer to normal than this summer, this firm will survive. Once a stock gets as cheap as it is, you just need to bet that it will survive to make money.
That’s the case with many energy stocks. Whiting Petroleum filed for Chapter 11 bankruptcy on Wednesday. That’s a great sign the oil market is close to a bottom because Russia and Saudi Arabia are trying to kill fracking. When they see firms going bust, they will start negotiating on a truce to cut production.
Even though they have low production costs, their governments garner revenue from oil (the higher the better). As you can see from the chart below, the Bloomberg Commodity index is at the lowest price since the mid-1970s.
Utilities sector was slammed on Wednesday as it fell 6.12%. That’s a 9.8% decline in 2 days. Real estate fell 6.11% and the financials fell 5.97%. Wells Fargo is only up 5.2% from its low last Monday. It has a dividend yield of 7.68%.
An Update On Covid-19
Our situation on COVID-19 got worse on Wednesday as President Trump said that experts claim the modeling in the best case scenario 100,000 to 240,000 Americans may die. Only good news is the betting market shows there’s only a 38% chance of 1 million cases in America by April 15th.
There is a 49% chance there are 5-10 million cases worldwide by April 30th. That’s a very grim picture. There will be over 1 million total cases on Thursday and over 50,000 deaths.
Wednesday was very bad for America as there were 26,473 new cases which is a new high. There were 1,049 new deaths which is also a new high. And there were 8,195 new cases in Spain which is slightly below the high. Also, there were 923 new deaths which is a new high.
Italy has been improving. But Wednesday was a step backwards as there were 4,782 new cases which was the highest since March 29th. On the positive side, there were 729 new deaths which was the lowest since March 26th.
Germany also had a poor day. There were 6,173 new cases which was up from 4,923. There were 156 deaths which was a new high. Germany has seen a much higher survival rate than the other countries it seems.
The graphic above shows the potential good news coming for America. As you can see, the dark purple indicates the states that will see a peak in demand for hospital resources in the next 2 weeks. New York could finally hear some good news soon. If it does, stocks will rally and if it doesn’t, we could see a new low.
Several are betting on the former, but open to the latter. We have blown past Cuomo’s projections for a peak. Every week he says there will be a peak in 2-3 weeks. One day he will be correct!