Off A Cliff….

Off A Cliff….

May 09, 2020

“The economy fell off a cliff.”

          -Constance Hunter, chief economist at KPMG LLP 

In this Friday note, you’ll find commentary and salient points on: 

  • Unemployment - in the month of April, the US shed all of the new job growth created since the GFC
  • Initial jobless claims, though, are thankfully trending down
  • Q1 GDP estimates range from -4.1% to -7.70%; a recession has arrived
  • On 24 April, Congress enacted an additional $484 billion in stimulus
  • FOMC Chair Powell, in a virtual town hall, reaffirmed the Fed’s resolve to act “forcefully, proactively & aggressively” until the economy stabilizes
  • COVID cases rates in the most dramatically affected parts of the world are flattening-- suggesting that the first wave of infection may be cresting
  • FasterCures of the Milken Institute revealed that there are 197 therapies and 111 vaccine candidates they are tracking
  • Several countries and a select few states are beginning a gradual re-opening
  •  Maybe it’s time to get constructive about the economy?  

Unemployment & (Un)Economy

We sort of expected this.  Sort of. But with last week’s unemployment claims coming in at over 3.2 million, it’s as if the front fell off. This brings the total job number of ongoing claims to 33.5 million. This all began on March 14th when COVID-related claims first jumped. And although it is the smallest weekly decline since then, it is 15X the typical early March readings.  This is the largest and sharpest drop in employment-ever.  

A lifetime ago... just this past February, when joblessness was at a half-century low of 3.5%, the country notched a record 113 straight months of job creation. In one month- April 2020 - the US economy shed all of the jobs it added in the past decade. 

Has the first wave crested?  Many economists are hopeful since the rate of new jobless claims is declining.  But I, too, hear that cynical voice.  The one that says “soon enough, there will be no one left to fire”. Maybe that voice is right.  Maybe we’re already at that point.  Certainly we all hope that job loss figures ease in May. 

Aside from the jobless numbers, 3 additional developments hold significance for us as we look forward.  

First, the BEA (Bureau of Economic Analysis) released its advance estimate of Q1 2020 GDP, anticipating a -4.8% decline.  To state the obvious, we are in a recession.  The Goldman Sachs Economics Research (GSER) team expects the final adjustment to bring that number down to -7.7% before the books close on Q1. 

This decline has been driven by a significant drop in consumption across a wider range of areas, ranging from non-COVID-19 healthcare services, to travel and leisure, and hospitality services.   In US real estate, hotels have certainly been among the hardest hit sectors, along with malls and shopping centers. With some non-pharmaceutical interventions (NPIs) such as shelter-in-place orders being gradually lifted, these sectors should show gradual improvement.   

Second, on April 24, Congress enacted an additional $484 billion in fiscal support for small business-lending and fiscal assistance for hospitals.  This latest bill is equal to 2.1% of GDP, and brings the total of the three-and-a-half phases of the fiscal stimulus packages now to $2.5 Trillion, or 12.1% of GDP.   

Economists by and large expect another $350 -$550 billion to come before the end of 2020, in the form of extended unemployment benefits ($150-$300 billion) and aid to states ( $200 billion).  The chart below, courtesy of Goldman (GSER) shows that the US Policy response dwarfs that of other countries and regions:

Third, on April 29th, the Fed Chair Jerome Powell hosted a virtual press conference, in which he confirmed that the federal funds rate target would be held at zero to 0.25%, and stated that the Fed would use its “full range of tools...forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.”


It has come at great cost, but the rate of COVID 19 infections is declining in most highly-afflicted parts of the world.  This unabashed good news is owing to the extensive NPIs - non-Pharmaceutical interventions - such as social distancing measures and shelter-in-place orders which have been enacted. While world- wide infections continue to increase, reaching 3.81m cases, the daily pace has plateaued.

And even better news awaited us on the survivability front.  As rates of infection level-off, so has the case fatality rate.  The global death toll from COVID-19 continues to grow, reaching 269,068 as of May 8, 2020,but the fatality rate has stabilized at around 7.03% of cases as of May 2.  

Fatality rates are virtually impossible to gauge in the early stages of a pandemic, as time, greatly expanded testing, and better quality data are needed to appropriately measure what is actually going on.  

Thus it is also encouraging when we see the data from certain isolated populations, such as the USS Roosevelt, which suggest that the case fatality may be < 0.56%. 

(Not So) Grand Re-Opening:

With this flattening of the curve, a small number of US states and several countries are beginning to reopen their economies in a gradual fashion.  The rate of daily new infections in all of these countries is declining at this time: 

Dr. Mark McClellan is the Director of the Duke-Margolis Center for Health Policy at Duke University (and former commissioner of the US FDA).  On March 29th he and his colleagues published a report for the American Enterprise Institute entitled “National Coronavirus Response: A Road Map to Reopening”.  In it, he and his fellow authors recommend that 4 tests be met before societies can move from Phase 1 of the pandemic - slowing its spread - to Phase 2, which is a gradual reopening:

  • Sustained Reduction on cases for at least 14 days
  • Hospitals are safely able to treat all patients without resorting to crisis standards of care.
  • Ability to test all people with COVID-19 symptoms and 
  • Active monitoring of confirmed cases and their contacts 

Of the six US states listed above, not one of them meets all four criteria successfully according to Dr. McClellan, though some states meet most of them.  

The biggest challenge is testing.  The US is currently conducting about 1.6 million tests each week now.  While the expert recommendations vary greatly, Dr. McClellan and team believe that 4-5 million tests per week are needed, while the Harvard Global Health Institute has suggested that 3.8 million tests per week, and the Rockefeller Foundation has a range of 3 million to 30 million per week.

While NPIs are not ideal, one must be given to wonder if these states, shorn of such inhibitions, will experience a renewed wave of infections. 

Therapies & Vaccines:

“Most vaccinologists are smitten with their vaccine, and most of the time, their love is unrequited!”  

- Dr. Richard Hatchett, CEO of the Coalition for Epidemic Preparedness          

If the long and arduous path of malaria disease control and vaccine development were not warning enough, Dr. Hatchett’s observation serves to remind us of the uncertainties that are ever-present in the development and production of a successful vaccine.  

Given the staggering sums of resources and intelligence devoted to this pursuit, it would certainly seem that we can be optimistic.  In the very least, it is hoped that successful treatments and  therapies will intervene while the search for a vaccine continues.  With luck, we will get there before the last resort of herd immunity kicks in. The consensus among infectious disease experts is that between 60-80% of the population must be immune to stop the virus’ spread.

The oft-stated goal is to deliver a vaccine in 12-18 months, which many experts including Dr. Richard Hatchett of CEPI, frame as an “aspirational goal”.  This is  because it has never been done.  So, we must remain cautious in our optimism.

Still, the progress and speed of development in this space are astounding and encouraging.  FasterCures of the Milken Institute counts 197 therapies and 111 vaccine candidates. 

An overwhelming amount of the news on potential therapies has focused on Remdesivir, the Gilead antiviral treatment which has shown to accelerate time to recovery from 15 days to 11. The drug showed some improvement in survival as well.  But more treatments are needed, some of which involve the use of antibodies to neutralize the virus.  

Hopefully some of these treatments will be found to reduce hospital time, reduce mortality and buy time for the development of a vaccine. 

Market Mayhem

The economy’s opening and the Fed’s & Treasury’s rapid response to the crisis have led to a march higher for the stock market index averages.  The S&P 500 is now 30.79 % above it’s mid-March low. 

Many clients are asking key questions:

  • For clients that have remained fully invested, does it still make sense to remain so?   
  • For those with uninvested cash or defensive positions, should they await a meaningful pull-back or follow other recommendations, such as to average in over time?  

At their root, these questions ask, has the market “bottomed” and is it now safe to move in?  Of course, we can not know the answer to that question, but it may be important to ponder nonetheless.   

The deeper reality is that investing is less about market timing than it is about time in the market.   Too many investors have irrational concerns about the general direction of the market, when instead, their focus should be on deploying their family’s hard-earned savings into a business that has strong cash flow potential, and importantly, not paying alot for the business.   

There are more of these businesses available today than just a few months ago.  It is our determination to invest when we see a compelling opportunity- when we can buy a share of a company with strong cash flow, an equally strong balance sheet, and wonderful managers - and, importantly, not pay too much for it, we shall invest.  These exacting criteria winnow the candidates to a select few, but the number of candidates (the opportunity set) has been increasing lately.

Market Metrics:

We must always be careful when we generalize; for the “market” can mean many things.  Consider: 

NASDAQ YTD Return:    + 3.93%

S&P 500 YTD Return:     -10.48%

DJIA 30 YTD Return:      -16.16%

Russell 2000 (Sm Cap):  -20.29%

So, which is the “market” we are discussing?  Often, when we speak of “the market” we are guilty of a fallacy of composition. 

From the above discussion, you will know we pay a great deal of attention to valuations.  And, as many a weary ear can attest, we have been concerned about the ‘level of the market’ - meaning the index’s valuation(s) - for a while now. Heading into the COVID-19 crisis, the median price-to-sales ratio had never been higher. Never.  Does a 10% discount now make this more acceptable? 

Similarly, the “Buffet Yardstick”, which measures the total stock market capitalization vs. GDP (a similar measure of total stock market value to total sales in the economy), was also near its all-time-high, and the recent correction has done precious little to alleviate this overvaluation. 

Therefore, in spite of the recent sell off and recovery, index valuations remain elevated.  

From the standpoint of valuation, therefore, it is difficult for us to get very constructive about the “market” by which I mean the “Index Averages”.   

Of course, the “market” - e.g. the S&P 500 has had a great run over the past 5 years or so, even though there have been a few hair-raising sell offs, one in Q4 2018 and then again this March.   Surely this was driven by profits expanding?  As every Finance 101 student knows, it is profits -  income and cash flow - which make a company valuable and which, in turn, power stock prices higher.  And if profits are expanding, doesn’t that make the valuations more attractive? 

Astute readers may recall that in prior note, Mr. Market Hits the Canvas, we shared to following chart:  

This chart, courtesy of  the St. Louis Fed, shows that while corporate profits have stagnated (since 2014!), corporate debt levels have continued to climb.  It is clear that as profits have been flat, the balance sheets of corporate America have deteriorated - dramatically.   

With much of this new debt being used for stock buybacks, supporting the stock price and further large-portion being used to rollover old debts, precious little was used productively to fund new development, investment in property, plant, and equipment or seed new initiatives.   

The total number of publicly traded shares outstanding has continued to decline as a result of buybacks and mergers and acquisitions:

Can it continue?  Share buybacks, one of the key building blocks for the nearly 11-year bull market run, have gotten off to a slow start in 2020, which, if sustained, could pose a threat to the Wall Street rally.

Companies in January announced just $13.7 billion of repurchases, the slowest opener since 2013 and coming off a 2019 that saw a 30% drop-off from the previous year, according to AllianceBernstein. Despite a considerable bout of volatility, the market nonetheless had a solid January, rising about 1.2%.  

Companies have proven to be no different from individual investors (with the notable exception of Harry Singleton and a few others), buying the most at the top, and precious little when stocks are cheap.  This pillar of support for the “market’s” valuations is now crumbling.

Bear Market Profile

What is a bear market, anyway?  Wall Street consensus is that a 20% or greater  decline in a market index or (in some cases) an industry segment or individual stock, is the hallmark of  a bear market.   

By that measure, the -34% swoon in the S&P 500 from its  February 19th high surely qualifies.  Now that the S&P 500 has risen +31% above its March 24 low, is the bear market over? 

For an answer we can turn to Bob Farrell, Wall Street’s best stock-market technician, at least according to Institutional Investor polling in 16 of the 17 annual elections in which Farrell vied for that title.   

Mr. Farrell is perhaps best known for his 10 Rules of Investing, all of which deserve contemplation.   But here, I’ll draw your attention to Rule #8: 

  1. Bear markets have three stages – sharp down, reflexive rebound, and a drawn-out fundamental downtrend.

Most often, the reflexive rebound stage retraces between 50% - 70% of the previous decline.  So far, the S&P 500 has “re-traced” 69% of the previous decline.    Now comes the this a durable bounce?  


While the bounce in some market averages has been impressive, it lacks confirmation from small and medium sized companies.  Since small-cap & mid-cap stocks always lead a new advance, their lack of support is concerning.  

This is also true of large investors and institutions.  Equity buying has been dominated by smaller, retail accounts rather than enjoying the broader support of pension funds, institutions and insider-buying.  The so-called “smart money” has not joined in.  

Valuations for most market indexes are little changed, and remain generally unappealing. It would appear that the optimism surrounding stocks is based on further stimulus hopes and not on economic data, which is broadly & rapidly deteriorating.  

While many believe that the recovery will be “V” shaped and that the “market discounts” that future, we just don’t know.    This is not to say that the market cannot continue to rally.  In fact, Bob Farrell’s Rules #5 and #6 come to mind.  

It’s just that we can’t find value in the indexes.  But I want to be clear, that does not mean that we can not find value.  And when and where we do, we will invest appropriately.   

Where are we finding value now?   That is an important question.  One which I will answer ….in my next week’s letter!    But please make note:  

  • The US oil rig count has fallen 45% in just the past 6 weeks
  • The Federal Reserve Balance sheet has exploded by 62% in 8 weeks to over $6.72 Trillion
  • On Monday, the Treasury announced it will borrow a record $2.999 trillion during the second quarter, more than six times that of the prior three-month period.  
  • On April 29, Bloomberg reported that only 110,913 people went through U.S. airport security screening, down 95% from a year ago

With oil supply collapsing, the Fed’s balance sheet disfigured, and an expanding chasm between our nation’s spending and it’s income, we must tread carefully. 

Thanks for reading and I hope you’ll tune in next week. 

Wishing You Health


Christopher J. Haydel MBA, CFP, ChFC

Principal | Senior Financial Advisor

Haydel, Biel & Associates Wealth Management 

100 E. Corson Street, Suite 310 • Pasadena, CA 91103

Office: 626.529.8347 • Fax: 626.529.8506