Week Ending 2/28/2020


  • Stocks drop into correction territory in record time falling 11.45%.
  • The biggest point drop in the history of the Dow on Thursday, falling 1,190 points.
  • Interest rates plunge, the 10 and 30-year Treasury yields are at all-time lows.
  • A look back at the Spanish Flu, the Asian Flu, the Hong Kong Flu, and SARS.
  • The dividend yield on the S&P 500 exceeds the 30-year Treasury yield by the most since March of 2009.


Reality finally caught up to the stock market this week as US equities fell by a stunning 11.45%. It was the fastest decline into correction territory (a 10% drop from the high) ever and the worst week since the financial crisis. Despite news going into last weekend that the growth of the coronavirus (Covid-19) was possibly getting under control in China, outbreaks in Italy, South Korea, and Iran woke investors up to the fact that maybe there is a problem here or even a big problem. Micheal Ryan, the WHO’s chief of health emergencies, outlined three possible scenarios: (1) the virus can be contained, (2) the virus develops a regular pattern of continual or seasonal transmission, or (3) it becomes a pandemic. Goldman Sachs said that earnings would be flat this year, indicating two straight years of no earnings growth.

Stocks fell 3.3% on Monday, 3.1% on Tuesday, 0.6% on Wednesday, 4.4% on Thursday, and 0.7% on Friday.

On Thursday, the Dow fell by 1,190.05 points, the biggest one-day point drop in history (not percentage drop) as panic over the Covid-19 spread, putting the market into correction territory.

Stocks weren’t the only financial instrument to fall, interest rates also plunged. The yield on the 10-year Treasury dropped to 1.16% on Friday, an all-time low and 11 basis points less than the July 2016 low. The 30-year bond fell to 1.67%, another all-time low.

Where the economy goes from here is really a guess at this point. Ultimately it depends on how the virus plays out and how much of the economy might shut down, both in the US and around the world. Economic growth was starting to pick up around the world, but the virus may be enough to put recession fears back on the front burner. It is impossible to know how Covid-19 plays out, but this would not be the first virus to put a scare into equity markets.


The Spanish flu was a severe pandemic from 1918-1919 that infected about 1/3 of the world’s population. About 50 million people died worldwide and 675,000 in the US. This flu had a case-fatality ratio of greater than 2% making it a category 5 on the CDC Pandemic Severity Index (the worst possible level). Obviously, communication, medicine, and technology were not then what they are now, so the timing of the virus is not that precise, and the effectiveness of treatments was nowhere near what they would be today. The virus started in the spring of 1918. Using a 4/30/1918 start date, the market advanced by 20% over the next 12-months. However, it should be noted that there was a 40% decline prior to the virus from November of 1916 until December of 1917. Also, the Spanish Flu occurred towards the end of World War I so there were lots of other factors to consider which might have had a greater impact on the market.


The Asian Flu was a category 2 flu pandemic that started in China at the beginning of 1956 and ran until 1958. It reached the US in June of 1957 and killed 70,000. This flu occurred in two waves, and the second wave, which began in November was more severe. Worldwide estimates of fatalities range from 1 to 4 million. From the end of June until the market low at the end of October, stocks declined by 14%. However, the Fed had tightened monetary policy in the two years prior which led to a recession, there were also worries that the US was losing the cold war to Russia after the Soviets launched Sputnik, the first satellite to orbit the earth.


The Hong Kong flu began in July of 1968 and hit the US in September of that year. This flu was highly contagious and it spread rapidly. By December it had spread throughout the US. The virus peaked between December of 1968 and January of 1969. The flu killed one million people worldwide and 34,000 in the United States. The case-fatality ratio was below 0.5%, making it a category 2 disease on the Pandemic Severity Index.  From September through November, stocks were up by 9.6%, but the market would then slide by 17.4% from December until July. The market went sideways through the end of the year and would then full much further in 1970. However, in previous research I have done about this time period, the flu is not even mentioned, and the market decline started as the flu was peaking. That was an era of high flying stocks, an IPO craze, Nixon, the Fed got tight on money, inflation was accelerating, there were riots and crime so factors were the probable causes of the decline.


The SARS virus was limited in scope but deadly, spreading to 8,000 people and killing 800, mainly in Asia. The virus ran from late 2002 until July of 2003. From the January peak until the March low, stocks fell by 14% over a two-month period while the 10-year yielded about 3.5%.


In the four examples above, three were associated with sell-offs of between 14% and 18%. Although it is not clear the flu was even the main cause of these sell-offs. As of now, stocks are off by 12.6%. If the flu plays out to become a major economic event and pushes the economy into a recession, the sell-off could get a lot worse over time. But if it turns out to be a minor blip in the backdrop of a slowly improving worldwide economy, this could represent a buying opportunity. The likely scenario is somewhere in between, but until the picture becomes clearer the uncertainty of where the market goes is much higher than normal. And this does not even factor in that the lead Democrat in the primary race is Bernie Sanders.

One thing for sure, the sell-off in stocks and fall in bond yields, while not erasing the high p/e ratio of US equities, has made stocks look attractive to bonds at this time. According to David Wilson from Bloomberg, as of Thursday, the dividend yield on the S&P 500 now exceeds the yield on the 30-year Treasury bond by 24 basis points, the most since March of 2009.

In a world where the 10-year treasury yields 1.13% and the 30-year yields 1.65%, here are some examples of stocks with a financial strength rating of A++ by Value Line and big dividend yields:

To be clear, we are not recommending these stocks, but pointing them out as examples of some of the opportunities now available after this week’s damage. Of course, if the virus really damages economic activity, they may not be such good deals right now and would turn into better opportunities later.


Week Ending 2/21/2020


  • Stocks fall for the week.
  • Treasury yields continue to fall, 30-year is at an all-time low.
  • Good economic news.
  • Gold is racing higher.
  • Apple warns due to coronavirus.
  • Japan faces risk of recession.
  • Bernie marches on.


Stocks fell for the week by 1.05% in the US and 1.48% x-US. Bonds rallied by 0.53% as treasury yields continue to fall. The 30-year Treasury yield closed the week at 1.90%, an all-time low. The 10-year yield closed at 1.46%, the lowest level since 2016. The 3-month, at 1.56%, yields more than the 10-year indicating an inverted yield curve, a signal for a possible recession.


But economic news was for the most part positive. Housing starts and building permits were strong, beating expectations by more than 100,000. Regional Fed reports from New York and Philadelphia were also strong. The Atlanta Fed’s GDPNow model increased estimated Q1 growth from 2.40% to 2.60% and the NY Fed’s Nowcast was increased from 1.39% to 2.01%.


But gold is racing higher and is now at its highest point since February of 2013. Indicating worries about economic growth and exploding deficits around the world.


Apple announced on Monday that it won’t hit its projected revenue targets for the current quarter due to the impact of the coronavirus. Apple did not quantify the impact of the virus, saying it was too early. But Apple will be the first of many to announce lower earnings and sales as a result of the virus. There is hope that the spread of the virus is starting to slow, the trend is now lower on both a linear and exponential basis, indicating, that if reports are accurate, the virus might be getting under control.


Japan faces the risk of a recession. The country took an initial hit in the last quarter as the economy contracted at a 6.3% annualized rate due to a 10% rise in the national sales tax on October 1. Now, the coronavirus is hurting tourism and manufacturing.


Bernie Sanders won the Nevada caucuses cementing his lead for the Democratic nomination. A poor performance by Mike Bloomberg at the debates this week dropped hopes of a moderate nominee. For now, and it is early, it looks like a Sanders-Trump matchup. The market is counting on a Trump victory but nobody knows what will happen. But Trump is cheering Bernie on (and trying to stir up some trouble), writing on Twitter, “Looks like Crazy Bernie is doing well in the Great State of Nevada…Congratulations Bernie, & don’t let them take it away from you!”


Week Ending 2/14/2020


Stocks finished higher,  +1.77%, and +0.82% outside the US. It was another record close for US stocks. This, despite the fact that the coronavirus continues to shut down a portion of the Chinese economy, Bernie Sanders is the current Democratic frontrunner, and equity valuations are on the high side. There seems to be a huge disconnect. Or maybe it makes sense, bonds yield almost nothing, the 30-year yield has been dropping and is now at 2.04%, not far from the all-time low of 1.94% from last August, central banks remain supportive, and many think the coronavirus is a one-quarter phenomenon. A big risk is if inflation remerges, which would change the calculus on all of the above.


Trump set out his long-term plan for the budget, aiming to cut budget deficits by half as a percentage of the economy by 2024 and then by another half by 2029. The budget does not forecast any recession during that time period and of course, is light on the details of the proposed spending cuts.


Week Ending 2/7/2020


  • Stocks are up by 3.2% in the US and 2.1% x-US.
  • Another strong jobs report.
  • Macy’s to lay off 2,000.
  • Tesla’s stock continues burning higher.
  • Solid ISM report.
  • The trade deficit falls slightly.
  • A disaster for the Iowa caucuses.


Stocks had a big week advancing by 3.2% in the US and by 2.1% around the world. Bonds fell by 0.38%. Stocks were all but oblivious to the fact that a good portion of China has been paralyzed by the coronavirus. Markets were probably helped when China pumped billions of dollars into their economy to help offset the economic impact of the virus. Tesla’s stock has been on a parabolic rampage (see below).


The job market continues to be the strong point in the US economy. The US added 225,000 jobs last month, the unemployment rate ticked up to 3.6% from 3.5% due to an influx of new workers, and wages climbed by 3.1% compared to last year. Some of the job gains were attributed to mild weather in January. The three-month average of 211,000 is now trending above the 12-month average of 175,000.

But while jobs across the entire US economy are strong, brick and mortar retailers continue to be hammered, especially department stores. Macy’s announced that it will close 15 stores over the next three years and eliminate about 2,000 jobs.


In a move reminiscent of bitcoin or some of the internet highflyers from 1999/2000, TSLA was up by 447% from its June 3rd intraday low to its intraday high on Tuesday (2/4/2020). The stock closed the week down 22.7% from that point. The Company, which has been a favorite of the bears, has turned around investor sentiment from possible bankruptcy, too, according to famed investor Ron Baron, a possible $1 trillion in revenues within 10-years. Currently, Tesla has a free cash flow yield of 0.8%, and at its current market cap, Tesla is selling for $367,000 for each car delivered in 2019, while GM is valued at $6,400 per car, and BMW is at $17,000 per car.


The Institute for Supply Management’s manufacturing index came in at 50.90, back in expansionary territory for the first time since July and up from 47.8 in December. The survey was mostly conducted before the coronavirus outbreak. “The outbreak of the novel coronavirus in China is likely to significantly disrupt activity in 1Q20. The inevitable disruptions to China, as well as potential spillovers to the rest of the world, should become visible starting with the February report,” according to J.P. Morgan economists Joseph Lupton and Olya Borichevska.


The US trade deficit fell for the first time since 2013 to $617 billion from $628 billion last year. Exports fell for the first time since 2016, but imports fell even more, obviously due to tariffs. China dropped to third place as the biggest US trade partner, behind Canada and Mexico. A smaller deficit is likely a sign of weaker demand and slower worldwide growth.


The primary season officially got underway with the Iowa caucuses on Monday. Unfortunately, it pretty much turned into a disaster due to software problems. Results still are not complete yet, but so far Pete Buttigieg and Bernie Sanders are about tied with each getting about 26% of the delegates.


Week Ending 1/31/2020


  • US stocks drop by 2.2% and international stocks were off by 3.38%.
  • Bonds advanced by 0.76%.
  • Fears of the coronavirus set stocks back.
  • Q4 growth was 2.1%, 2.3% for the year.


US equities fell by 2.2% on the week on fears of the spread of, and economic impact from, the coronavirus. Since the virus broke out on January 17th, stocks are off by 3.11%. The timing is about in line with the market peak in January of 2018, stocks were on a daily climb similar to what we have seen this year, almost every day until January 26, when trade war talk triggered a quick 10% drop. Time will tell whether we get a similar follow-through this time around.

International stocks took a bigger hit, down by 3.38%. Investors fled into treasuries, advancing bonds by 0.76%. The 3-month/10-year yield curve inverted, as the yield on the 10-year Treasury bond dropped by 19 basis points to 1.51%.


There are now six cases of coronavirus confirmed in the US, and about 10,000 around the world, and there have been 200 fatalities. The economic impact is being felt in China. Hong Kong suspended high-speed rail to China, and reduced airline flights. The Shanghai Disneyland has closed and Starbucks has temporarily closed about 1/2 of their stores. Airlines have canceled many flights to and from. Millions of Chinese are in lockdown. Chinese stocks are down by about 11% since the outbreak. Sectors that have been hit by the virus (in terms of equity prices) are airlines, tourism, and oil and gas.

Believe it or not, the name though has created some confusion, as some actually think the virus and the Corona beer are connected. Search engines have been flooded with inquiries about the “beer virus” or the “corona beer virus”.


The Bureau of Economic Analysis reported that Q4 GDP grew by 2.1%, in line with Q3. For the year, GDP was up by 2.3%. Personal consumption, which comprises 2/3 of economic activity, rose by 1.8%, the slowest rate in three quarters.


At the halfway mark of earnings season, 2/3 of S&P 500 companies that have reported have beat their estimates. Solid reports from market leaders Apple, Tesla, and Amazon have helped. Earnings for the quarter are now expected to be down 0.3% from last year, versus the original -1% estimate. The 2020 estimate looks for a 9% gain. Of course, that will come down with time.


It has been 1,316 days since British voters decided to leave the EU, and here it is. The UK has now officially left the European Union. There is now an 11-month transition period where the two parties will try to reach some sort of deal.