After the Bat Hits the Fan…
Just like the past, the future will show that pessimism about the United States is unlikely to investment success.
Sure, I know that sounds touch to swallow just now. It’s easier to take the "It'll never get better again" approach.
Pessimism always sounds smarter and feels easier.
Now, more than ever, we need to have a protective mental / emotional shield against the massive waves of "news," while recognizing that a very small portion of it remains valuable.
And yes, you will surely hear the very first time somebody walks into a mall and four days later tests positive for COVID.
It will feel terrifying and all encompassing. But in the end, we are very (very) likely to find that this was a dreadful policy choice.
So, here’s the flip side.
Many things will also work. Many things will be better. Many new things will arise and be built. And many things will surprise us to the upside.
The new normal will become normal sooner than we think and will only be interrupted by the next "new normal."
Remember, it was not that many weeks ago that most were certain the end of our society as we know it was going to be caused by The China Tariff War.
Sounds strange now even writing it.
The Market's Voice?
Let’s take a look at a whole bunch of events driven by our emotional reactions all rolled into one chart:
The chart above shows the S&P 500 Index, which now has over 42%+ Tech weighting.
The broader market admittedly looks weaker (below) and has more work to do.
But the patient investor will recognize that the strength of the Tech sector will indeed be the major rebuilder of the 'weaker" areas seen in the NYSE Composite below:
Remember that in the short run (the charts), markets give you a reading on how the crowd "feels."
And in the long run the market provides growth and a measure of value for the long-term investor.
The S&P 500 -
1) The green star at the top marks the top of the markets roughly 6-8 weeks ago. Keep in mind that when this price is breached to the upside, a new secular bull market will have broken out. Yes, that will take a bit of work. Yes, that will include up and down movement. No, it won't be fun. But - secular bulls last for a decade, at least.
2) Note the red bracketed channel above. It goes back to the highs of January 2018. Back then we noted a "trade range was likely" as the rest of 2018 unfolded given the gains of 2017. The point? Two years and two months later, along with a global pandemic we are generally in the same spot. Now, can you just imagine for a moment the amount of force being built into this pipeline while everyone else tells you what to be terrified of for the rest of your life? For us, we’ll stick to focusing on the former and not the latter.
3) The green boxes highlight the rare occurrences where we have seen prices escape from this lengthy range. The timeframe from the top portion was a few weeks (the bear market). The time for the bottom portion - a few months.
4) We expect the meat of the earnings season over the next two weeks may provide for some pressures on prices to take advantage of on the rebalances ahead, along with those traders who will sell in May and go away, which is likely to be as wrong this year as it was last. Ample opportunity is set to be seeded as things calm down a bit and this chop unfolds as summer approaches.
Keep this thought though as well: If we DON'T get a nice little bout of weakness and chop when it is most likely here - the odds slowly become that the market is telling you something most cannot fathom; that it’s well beyond "pandemic" and focused more on The New Economy of 2021 and beyond.
Now for the NYSE Composite, which represents the broader market.
It is clearly weaker. But the tech wave will rise through the systems, processes and departments of all those companies struggling to work through this mess.
1) The green star at the top marks the top of the markets roughly 6-8 weeks ago. Again, once this price is breached to the upside, a new secular bull market will have broken out. Yes, that will take a bit of work, but it also suggests a 33% gain once we get back there.
2) Note the red bracketed channel. It too goes back to the highs of January 2018. The point? As you can see, we are well below that channel right now. And I suspect we struggle a bit here as earnings flood through and the "sell in May" crowd preps for an idle summer. My hunch is this summer won't be as boring as most summers are, and the "swoon" so many fear during summer sessions should be something that’s hoped for at the time...
3) The green boxes highlight the rare occurrences where we have seen prices escape from this lengthy range. Note that prices have not reached back into that range as yet.
4) Again, the earnings season rush over the next two weeks may provide for some pressures on prices to take advantage of on the rebalances ahead, along with those traders who will “Sell in May” and likely to be as wrong this year as they were last year. Ample opportunity is set to be seeded as things calm down a bit and this chop unfolds as summer approaches.
The Bottom Line
We would all be remiss if we underestimate the massive forces at work here in the US - science, technology, AI, super computers - and most important - the people focused like a laser on killing this enemy.
Some High-Level Thoughts...
First, cash demand is one of the reasons the Fed had to flood the markets with dollars, and all the while seeing the dollar become stronger as the world demands American currency when the bats hit the fan : )
Notice that the last spike to the right far outweighs the spike represented by the 2008-2009 setbacks - and the DOW is 3.5 times higher.
The chart above from Scott Grannis at Calafia Beach Pundit shows the 3-month annualized growth in bank savings and demand deposits.
This is another way of demonstrating how strong the demand for money has become (Read: Off the charts strong) given the uncertainties of the virus and the economic shutdowns.
Cash in accounts in recent data now sits at near $15 Trillion, which is a vast rainy-day fund for the US consumer.
The chart below shows you the TED spread. It’s the difference between 3-month Treasury bill yields and 3-month LIBOR.
It’s often seen as a barometer of the market's confidence in banking systems (tighter spreads = more confidence, and vice versa).
Yes, spreads are still elevated, but have come well off their initial surge, and are also nowhere near the levels seen during most of the 2008-2009 financial crisis.
The main area of concern for credit markets remains the energy sector, since oil prices have tumbled.
Be confident that there is more money ready to pounce on "fixing this problem" than the size of the problem itself.
Folks, the disconnect between markets and the economy is that we live "now" - the market thinks "next."
Be sure that everything is going to change.