Articles

COVID-19 – Jobless Claims, the Stock Market, and Inflation

April 14, 2020

Jobless Claims

We continue to see a divergence between Wall St, Washington, and Main St. This chart of US Weekly initial jobless claims is staggering. The number of people being laid off, furloughed or salary-reduced is not fully captured by this chart either.

 

 

This video puts it in context and shows just how dramatic this all is.

Stock Market

We are watching the markets daily and have seen one of the best weeks ever fueled by more federal stimulus from Washington and the Federal Reserve. That is typically not what you want to see and not what drives a bull market. A bull market is driven by wage growth, corporations investing in new projects and profits and innovation, not financial stimulus innovation.

We are inundated with market updates and commentaries from the most storied names in investments and all of them feel like there is a divergence between what should be happening and what is happening within the markets. This picture to the right says it all. Look closely before continuing.

Let’s look at what we are really looking for. We are looking for the Dow to recapture and hold 25,200 on a weekly chart. That would indicate that we are in a V – Recovery. The Federal Reserve, Washington, and the President are doing as much as they can, it seems, to ensure that happens.

Below is a chart comparing the Dow Jones Index to the 1929 Stock market crash. You can see in 1929 the market rebounded very similarly to what we experienced the last couple of weeks and then never really made it back up. The Dow rolled over and continued months of losses. The other thing to keep in mind from looking at this chart is that from the peak to the edge of the chart, it spans almost a year and a half. It is hard to see is how long it lasted on just the chart below.

We are in month one here in the US, so we are urging patience for this to play out. We all want this to be over, but time will tell. As we have said before, some leading economic data was starting to sour at the end of 2019 when we saw the Fed step in and plug the Repo market. So, this downturn isn’t necessarily all related to COVID-19, in our opinion. We still have not seen one earnings report or one forecast for Q2 or beyond from any publicly traded company to see how this is really affecting revenue, costs, and the bottom line.

For reference, this chart and comparison were done on April 6th. We are looking for the Dow Jones to break the third or top straight line to confirm we are back on the bull trend. In the 1929 crash, we saw a violent upswing like what we are seeing now and then it relapsed and went back down.

We are not saying that this is going to cause a great depression. The government and Federal Reserve have already done so much to prevent that from happening. What we are saying is this has happened so fast, we haven’t really seen or heard any real numbers to judge the impact of this event yet. The Fibonacci levels above are used quite a bit in technical analysis and to look backward in the market to see how the market moved. They are a guide to show us what has happened historically and what could happen moving forward.

Other Pandemics and the Market’s Response

This chart puts into context the stock market in three pretty similar pandemics. We all know now that the Spanish Flu was pretty devastating, lasting 18 months and attacking most of the globe. You can see the market decline was substantial. Many are citing the 1956-57 Asian Flu pandemic as the most similar to COVID-19 with over 115,000 deaths globally. It struck the US during a time of great economic prosperity and expansion.

The 1968 Hong Kong influenza pandemic was similar as well to COVID-19, but came much later into a 20-year growth cycle in America and preceded an economic decline and tougher times within the United States which was felt later in the 1970s.

Positive Signs

What positive signs are we looking for to see if things are all clear? We are looking to see countries lifting their lockdown orders while COVID-19 cases remain low. China and a few other smaller countries have lifted their lockdowns, but data and information out of China have been hard to believe.

We are looking for the three-legged stool for fighting COVID-19:

  1. An agreed-upon treatment plan for those that have it, based on science and appropriate trials and testing procedures
  2. Lightning-fast agreed-upon testing kits to confirm positive cases
  3. A potential vaccine to prevent the COVID-19 infection

It appears we have a good start on #2, and lots of companies racing to prove out #1 and #3.

On the financial front, we are looking for a return to a more normal yield curve on the US Treasury’s where 30-year rates are returning to 2-4% and the 10-year Treasury returns north of 1-2.5%. Currently, those rates are all still compressed below 1.5%.

We are also looking at the volatility index, often referred to as the VIX, which is a measure of market volatility. It had a normal reading below 30 over the last 10-year bull market. As of Thursday’s close, it was clocking in at 41.67, down from nearly 86 at the height of the panic.

We are also looking for corporate earnings reports to come in and to hear from different management teams to see what they are seeing, what their outlooks are, how much they are able to operate and how they are sustaining operations through this time and any basic projections they have to recover from this.

Inflation

Many are asking about inflation and the loss of purchasing power of the dollar as money is created out of thin air. The truth is this has been happening since 1913 but it is just now getting the attention of most Americans. Most people overseas are used to dealing in multiple currencies or assets as their currencies are less stable and the need for surrounding countries’ currency for business and commerce is helpful. We have been largely sheltered from that in the US with our nearly 200-year stable currency, strong economic and military power, and the freedom to create and innovate establishing the greatest nation in the history of the world.

We do think that inflation will be in effect as it always has, but we don’t see the hyper-inflation scenario anytime soon that most talk about. The US is still the most dominant and free country in the world and there is no other currency more in demand globally right now than the dollar. We do think Gold and Bitcoin will continue to rise in value against the dollar as we pull out of this COVID-19 pandemic. They will act as an alternative to the dollar for those to save and diversify. Neither are ready to step into the liquidity and ease the dollar has achieved, which would be required to replace the dollar.

Summary

We are living through a once in a 100-year type event and we are working hard to manage the risk, your money, and our firm’s response. We appreciate your prayers, patience, and understanding. It is our job and goal to try and grow your wealth and protect it all at the same time. We have never seen such awareness and distrust for the Federal Reserve as we are seeing and hearing today. It is blatant socialization of corporate losses and an extreme bailout of the hedge fund and private equity community.

These types of events, although scary, are meant to wipe out and eliminate misallocated capital, so the debt can be removed and written off from the system. Assets are reorganized by new management and new capital to continue viable operations. That is not happening. We are seeing the losses covered with more debt.

With that thought and being in the investment business, it seems one of the oldest pieces of advice rings true: don’t fight the Fed. Nothing rang truer this week than that with their asset purchases of High-Yield debt and other market stimulus efforts. When you can print and expand your balance sheet by trillions of dollars overnight and cover losses for your friends, when does it end? What incentive is there to manage risk at that level or do the right thing?

We are trying to determine if this recovery is real and if the stock market is on solid of ground as it may appear. As the chart of the great depression showed many felt the same way then as they do now, and that outcome was tragically worse. We hope that is not the case, but history often does repeat itself and it is our job to protect against that.

We hope that you had the best Easter possible this year as it was probably very different than many you have had in the past but it is still a time to rejoice as a family in our true Savior Jesus Christ! We can rejoice because He is risen, and He is with us in this time.