- Coronavirus/COVID-19 has caused an unprecedented economic shock to the global economy that has been met by unprecedented policy response.
- New infections continue to hit, and the U.S. set a high for deaths in a day this past weekend.
- There's mounting pressure to reopen the economy quickly, and several southern states have started the process, ignoring health guidelines.
- The infection and death curves, which had been starting to bend down around Easter, have suddenly started to threaten to bend back upward.
- Reopening too quickly could undo all the progress made and create a chain of events leading to deeper stock market crash, a depression and more death.
- This idea was discussed in more depth with members of my private investing community, Margin of Safety Investing. Get started today »
I don't play an epidemiologist or biologist on the Internet. But I do understand math. And this weekend, the United States had the deadliest day yet from Coronavirus/COVID-19. We have not "bent the curve." And that's very dangerous as 30 states, some faster than others, begin the reopening process.
I believe the evidence shows very convincingly that if we reopen too much, too quickly, we will see an extension of the first wave of COVID-19 and a second wave that comes quicker and more fierce than the CDC already predicts will happen in autumn.
If those are the scenarios that play out, then the stock market will react first to more anticipated economic carnage. A longer, more severe first wave of COVID-19, followed by a severe second wave, would necessitate an even stricter shutdown that likely lasts about three months.
In that scenario, we could see a mega-crash in the stock market that not only sets new lows, but heads to a levels not seen since 2012. What's worse is that could thrust ourselves into a depression that does, in fact, rival the 1930s and is marked by a period of stagflation.
If you are a risk-averse investor and do not want to lose a year or two on your investing calendar, in addition to some permanent losses from companies that do go to zero, then I urge you, sell down your equity holdings today and reassess your planned asset allocation strategy for the 2020s.
Unbending The Coronavirus Curve
We have learned that coronavirus is very contagious. Yet, when I went to pick up my groceries curbside at a Kroger food store this weekend, I counted over a 100 people walking into and out of the store, with fewer than one-fifth wearing masks. I drove by another grocery store and observed the same thing. I also saw a bar parking lot full (Wisconsin bars are still not supposed to be open) with people walking in and out, none with masks. I know of at least four speakeasies in just my corner of Greater Milwaukee.
It's not just a few places though. You know it. You have seen pictures and heard about people hanging out in close quarters without masks. There's a very large segment of society that's not helping to contain coronavirus. These people are somehow attached to the idea that COVID-19 is no more than a slightly severe flu, that it won't hurt them or those they come into contact with.
Let me try remedy anybody having that ignorance. The following chart is from MIT using machine learning. It's a predictive model based on our behaviors. Remember, these are same people who beat Vegas for years before "the house" figured out it wasn't just their own cleaners pulling money off the tables.
As of May 4, over 70,000 people have been recorded as having died from COVID-19. The best-case scenario is 100,000 deaths by August 1 if we turn the curve over now - which is not going to happen.
Those recorded deaths are people who were seen by a doctor. According to CDC numbers, of expected deaths for the time of year versus actual deaths, the actual impact of this coronavirus is more than 100,000 additional deaths so far.
That means that either there are more COVID-19 deaths than recorded, something else leading to more deaths, or a combination of the two. The Bayesian equation we are looking for answers to is how many of those additional deaths are directly tied to COVID-19 and how many are indirect due to people not getting treatment for other maladies (which likely happened in New York City, as well as in nursing homes).
Snatching Defeat From The Jaws Of Victory
New York City, the epicenter of the U.S. outbreak, saw success in bringing the death rate down with a strict lockdown.
These are the states moving fastest toward being more open, some already opening certain businesses in a limited capacity.
As a member of the White House Coronavirus task force, Dr. Anthony Fauci has said that: “If you follow the guidelines, there’s a continuity that’s safe, that’s prudent and that’s careful... The concern that I have is that there are some states... who are looking at that and kind of leapfrogging over the first checkpoint.”
And that leapfrogging is where a great risk lies. Rather than plateauing around 100,000 deaths in August, which is the best-case MIT scenario, deaths could jump toward the upper bound near 300,000 if the infection rate accelerates.
Does anybody really think that the economy would do well under a scenario where infection and death rates pick up? If the infection and death rates accelerate, then the bailouts and lockdowns so far become wasted if we have to start over again in a month or two.
A Matter Of Confidence
The stock market and economy both work on confidence. If the COVID-19 infection and death rates are allowed to accelerate again, the sock market will pick up on that almost immediately. I believe the selling late last week was a taste of more than a technical breather in the rally. I believe it was smarter players taking profits knowing that we are very likely to massively mess this up.
With money tightening and a disease stalking, reopening an economy that people are afraid to go out into will not cause the "V-shaped" recovery people hope for.
Without dramatically cutting the infection and death rates, what are the odds that the economy picks up? People can say they want to get back to work, but how many are going to head out and spend? The economy is directly linked to beating back COVID-19.
The question that governors and the president need to ask right now is: Is reopening in the next few weeks the prudent economic action? I would suggest it's not. I believe the southern states already are putting their regional economies at greater risk than staying shut another month would do.
If infections and deaths surge, they are essentially resetting the clock on shutdowns. And because of the amount of interstate travel, they are risking stoking the infection and death flames in other states, which is remarkably unethical.
Household Finances, Wealth Inequality and COVID-19
I understand why people want the economy to reopen. They need their paychecks. Even in by far the richest large nation on earth, three-quarters of Americans live paycheck to paycheck.
So, it would seem that given the protests occurring around America, at least some of that angst is rooted in financial stress. I think we can all agree that is true.
At this point, to keep American mostly at home and doing what it can to beat COVID-19 down to buy time for better antivirals and vaccines, there would clearly need to be another relief bill. That's what we should be doing rather than reopening the economy.
The Treasury and Federal Reserve just pumped upwards of $4 trillion to bail out the bond market. Another $670 billion has been earmarked to keep businesses from firing people through the Paycheck Protection Program. The $1,200 checks that went out totaled about $200 billion.
At this point, given the considerable financial efforts already made, it makes no sense to allow COVID-19 to regain its rate of infection and undermine those efforts. The president and Congress should expand PPP by a few hundred billion more, commit to at least three months of $1,200 checks and pass a law requiring banks to move up to six months of mortgage payments to the back end of loans, while allocating some relief money to paying the banks some missed interest in the meantime. That might add up to near another trillion dollars, but that cost would be far less than a brand new shutdown.
In a recent piece, "Use The Biggest Sucker's Rally In History To Kill Your Zombies," I projected that the economy, presuming we would keep our collective boot on the neck of the disease until the curves were bent, would lose around $3 trillion. We are on that pace, and large firms, as well as Jeffrey Gundlach, came around to my thinking at the time.
If we allow the disease spread to accelerate, I believe the economy would lose closer to $5-6 trillion this year. This would occur because in a second shutdown, versus extending the first for another month or two, we would be starting over and looking at another three- to four-month lockdown to relieve stress on hospitals and bend the curve for real next time.
How Bad Is The Economy?
There's an idea floated that pent-up demand will create a rocket-like take-off for the economy. That's not just unlikely, it's impossible. Are you going to run out and make up for all missed meals out, trips taken and movies seen at a theater? Ask AMC Entertainment (AMC). The company is already on the brink of bankruptcy. People aren't flooding it with gift card purchases for future viewings.
There's no way that manufacturing will pick up again either. Consider Boeing (BA). The airlines do not expect to reach peak travel again until a year or two or three after a vaccine is mass-administered, which at the earliest is late next year (yes, we could see some vaccines in limited supply earlier, I hope so). So, with the airlines likely suffering a retrenchment that will last years, that hits Boeing because demand for new planes falls. That rolls onto suppliers. Boeing is a big deal in the economy.
Now look at autos. As Ford (F) Chairman William Clay Ford, Jr., recently pointed out, auto manufacturers already were struggling in trying to build for both the old (internal combustion engine) world and the new world (EVs). Now, with demand crushed, where does that leave the entire industry? There are thousands of cars parked on ships right now with nowhere to go. That rattles down through the economy too. Better to suffer for the next few months, or have a rerun too?
The depth of the economic destruction will be the basis of books someday soon. There's no shortage of bad data. But what makes it worse is that the economy has been weakening for over a year now.
I always watch employment. As it goes, so goes the economy in short order. This was not a solid foundation we started on. Now, with Coronavirus, and don't forget the destruction in the oil space, there's almost no hope for a quick recovery. And if we do more damage in the short run, then the long run gets further away.
How Low Can The Stock Market Go?
I have seen face-ripping bear market rallies before in the early 2000s and during the months after the financial crisis began in 2008. The current rally is similar. As I pointed out, it's based on the "hopium" that the Fed can float the stock market and that we can beat back Coronavirus enough to restart the economy at nearly full speed quickly, the so-called "V-shaped" recovery.
Don't hold your breath. Hopium isn't based in reality.
There's misplaced hope that the Fed's money can float stocks. The reality, as mentioned above, is that the Fed's firepower is aimed at bailing out the bond market. Very little is going to get into the stock market. There's almost no likelihood that legislation would allow the Fed to buy stocks, especially not with its balance sheet the way it is now.
The stock market is waking up to the reality of the long-lasting economic damage that this pandemic has wrought and that the Fed really isn't infinite.
The damage we face cannot be wished away. And it can get worse with ill-advised actions. The market will react if things do not improve fast as expectations from the rally warrant.
How low can stocks go? Here's the chart I have provided for members of Margin of Safety Investing. Each line represents a broad confluence of support levels. While I don't share the algos I use, the red lines are all very viable ranges for the SPDR S&P 500 Trust ETF (SPY) to get to. The yellow line would represent a partial retrace if a bull market has indeed begun.
I'm not a great Elliott Wave technician, but I understand them. We are currently in a "decision phase" of a fourth wave. We'll see how it goes. I do prefer money flow measures, however, and that is not rosy at all.
The S&P 500 clearly got overbought recently, and that makes very little sense given how many companies in that index are in zombieland now.
The line to be concerned with is the bottom green dotted line. That represents a confluence of supports coming out of the financial crisis. What would it take to get down that low? First off, the mega-cap stocks would have to lose about 50%. That means Microsoft (MSFT) at about $80, Apple (AAPL) at about $150, and Amazon (AMZN) at about $1,100. While those prices might sound far-fetched, take a look at their charts. Not long ago, they traded at those prices.
The next thing that would need to happen is for a wave of bankruptcies to take dozens of stocks down to zero. While this would fairly quickly remove them from the index, it would be a wave that could last a few quarters at least.
Finally, if ETF holders started to panic, that could pull down even surviving companies by well over 50%. Have you ever known investors to mass-panic?
I walked through this scenario in my most recent Friday webinar and included a chart book with ETF picks for subscribers to Margin of Safety Investing:
I will keep this simple. You need to get rid of any weak companies. Recoveries will be long and slow where they happen. There isn't a single American oil stock I want right now (a series on that coming so make sure to follow). I don't want banks, as they are very vulnerable to recession, and without stock buybacks, their share prices are in trouble. I really don't want any stock that has to cut its buybacks, which is well over half, according to Goldman Sachs. Many REITs are in for years of pain.
Also, sell any S&P 500 ETFs. That index is in for a major retrenching that will see a transition from older, lower-growth companies to newer, growth-oriented companies. That transition will take time and be frustrating.
In the meantime, start looking at companies that will thrive in this new "work more from home" and "cook at home more" economy. And look to technology. There are ETFs that focus on the things I talked about earlier this year after I returned from the Consumer Electronics Show (CES 2020). Utilities suddenly look attractive again, in particular the ones leading the alternative energy revolution. At some point, home builders will be interesting, but you should wait for lower prices for now. And don't forget gold stocks, as I described in "Massive 2020s Gold And Gold Stock Bull Market Is Just Beginning."
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