Week Ending 4/24/2020


  • Stocks decline by about 1%.
  • Oil falls below $0 in futures markets.
  • It the real-time economy versus the Fed in the tug and war of the equity market.


It was a boring week by recent standards, US and international stocks both fell by about 1%. Bonds were up 0.09%.


The craziness this week was in the oil markets. Oil prices collapsed on Monday with the futures contract for West Texas Intermediate crude falling below $0 for the first time ever. In other words, people were being paid to accept the delivery of oil. The May contract expired on Tuesday and that forced a mad dash to unload contracts. The contract fell to as low as negative $37 per barrel.

The spot price for oil did not fall below $0, but the futures price did. Futures contracts are used by producers of oil to lock in a price to sell oil at a future point in time, and refiners do the same, to make sure they can buy oil at a certain price in the future. And of course, mixed in are speculators who trade the futures contract and provide liquidity. This particular futures contract, for West Texas Intermediate Crude, is for 1,000 barrels of oil and it requires physical settlement in Cushing, Oklahoma. That is different from Brent Crude, which settles in cash.

The actual movement of the crude to and from Cushing is done via pipelines. The problem is that the world is awash in so much oil there was no immediate demand for the product. That meant that if you were long the futures contract, you would have to take delivery of the oil, and if you couldn’t sell it, you would have to store it somewhere. But that presented the bigger problem because although Cushing, OK has storage for about 70 million barrels of oil, just about all of it was accounted for. There was no space to store the oil. That meant that the owners of the contract had no one to sell the oil to and nowhere to store it. So they had to find a buyer of their contract and effectively, at one point, they were paying $37 per barrel to a buyer to take it off their hands. That is $37,000 per contract. And it shows how the shutdown of the economy is impacting markets in ways that have never been seen before.


US stocks are currently 17.3% off their high. Which many would argue does not seem to make sense. The legendary investor Howard Marks said on CNBC on Monday, “We’re only 15% from the all-time high of February 19, it seems to be the world is more than 15% screwed up.”

Maybe it does make sense. What essentially we have is a tug of war between the fundamentals of the economy and the power of the Fed. On one hand, the economy is as bad as it has been since the Great Depression. Over 4 million filed for unemployment last week, bringing the total to more than 26 million over the last month. The estimated unemployment rate is 15%. Big retailers like JC Penny, Neiman Marcus, and Lord & Taylor are supposedly close to filing bankruptcy. Orders for durable goods fell by 14.3% last month, hotel occupancy was down by 64.4%, and GDP this quarter is estimated to be down about 7%.

On the other hand, the Fed has expanded its balance sheet to $6.5 trillion in the last two months and Congress has passed the $2 trillion CARES act and another stimulus bill this week for $484 billion. And as we have often shown in the past when the Fed expands its balance sheet, it often finds its way into higher asset prices, hence, the long-time saying – “Don’t fight the Fed.”

So we have this classic match of the muscle of the Fed versus the real-time fundamentals on the ground. Without the Fed, equity prices would almost certainly be much lower. But the Fed’s support is keeping the economy from being even worse, and hopefully buying time until the economy can reopen and start improving. Stock markets also are forward-looking, so investors might have written off 2020 and have their eyes on a better economy in 2021 and beyond. And all of the support by the Fed has resulted in unprecedented amounts of dollars being put directly in consumer’s pockets (“helicopter money”). If and when scientists develop effective therapeutics or a vaccine, the economy should begin to come back, maybe quickly, or at least, that seems to be what investors are counting on.

Investors are also looking at relative valuations.US stocks now have the biggest yield advantage over Treasuries in decades. The S&P 500 dividend yield is now greater than the 10-year Treasury by about 1.3%, which is more than the 1.2% gap in the recession from 2007 to 2009. Now it is true there are dividend cuts on the way, but even with that, the gap will probably remain significant.

Having said all of that, as we wrote about last week, we still think the near to intermediate-term risk is to the downside.


Week Ending 4/17/2020


  • The best two-week rally since 1938.
  • Trump outlines guidelines to reopen the economy.
  • Economic stats get worse and worse highlighted by 5.2 million more unemployment claims.
  • But the stock market is on a different page, up 31% from March 20th.
  • A detailed look at past bear markets.
  • History shows there is usually a retest of the lows.


Stocks rallied by 2.71% in the US and 1.14% x-US. US equities have put in their best two-week gain since 1938. The market is now off by 16.4% from the February 19th high. Over the last year, the overall US stock market is down 1.5% and the S&P 500 is up 1.1%.

Trump said on Monday that he wants to open the country “ahead of schedule” and different groups of governors announced they would be working together to coordinate the reopening of their states. Trump initially said he is the one to make the decision on when the country reopens, citing no legal basis for his claim. Previously, when determining when the country “would close”, Trump left it up to the states, but he said that he determines when it reopens, “When somebody is the president of the United States, the authority is total,” which is counter to what we all know. Later in the week, Trump reversed himself and then said he would leave it up to the Governors, but did outline guidelines that seemed to be based on good science.

The economic news gets worse and worse. Retail sales fell by 8.7% in March, the biggest drop since 1992. The NAHB/Wells Fargo Housing Market Index dropped by 58%. The index measures builders’ perceptions of the market for single-family homes. It was by far the largest drop ever. However, their chief economist Robert Dietz struck an optimistic note, “As social distancing and other mitigation efforts show signs of easing this health crisis, we expect that housing will play its traditional role of helping to lead the economy out of a recession later in 2020.”

Unemployment claims increased by another 5.2 million and now total about 22 million. All of the new jobs since the last recession have been wiped out. The Empire State Index of Manufacturing fell to its lowest level ever. Industrial production suffered the biggest decline since 1946. The International Monetary Fund said this will be the worst economic downturn since the Great Depression.

Despite all of this, US stocks are up by 31% from the intraday low on March 20th. There are good arguments that this rally is for real and that the low is in. There has been unprecedented action by the Federal Reserve and the government putting trillions of dollars in to support the economy. The markets have already written off 2020 and are looking forward. There is some progress on therapeutics and vaccines that will eventually end the coronavirus. Interest rates are basically at zero thereby making stocks more attractive. And, history generally shows that if you have a long enough time horizon investors will be rewarded for owning stocks at this level.

On the other hand, it would be very unusual for the equity markets to get away without a retest of the low, or something close to a retest. Below we take a look at the price action in bear markets since 1929.

Last week we showed how in 1929, a 46% drop followed by a 50% rally, was just the set up for further declines. We show that chart again here:

Here is 1937. Stocks fell by 40% from August through November, then rallied by 18%, and then fell another 26%. Overall, it was a 46% decline.

In 1940 when Hitler invaded France, stocks fell by 26%, rallied by 23%, then more or less went sideways for 9-months, down 16% and then up 12%, before falling another 28%. The overall decline was about 28%.

From May of 1942 until May of 1946, stocks increased by 129%. WWII ended in September of 1945, and by August of 1946, the postwar surge in demand fell off, the market dropped by 24% but it was highlighted by a 20% drop from August 12 to October 9th. The market then rallied by 12.8% and would fall again to test the lows, not once, but twice, over the next year. Then in the spring of 1948, a 17% rally was followed by a 16% drop that just took out the 1946 low. That set the stage for a rally into the 1950s.

The Asian Flu of 1957, led to a 19% decline. The flu killed 70,000 people in the US across two waves, one started in June of 1957 and a second wave that was more severe started in November. After the market hit bottom, it continued to rally without a retest.

The selloff starting in March of 1962 and lasting until June of 1962 resulted in a 26% sell-off. This was also known as the “Flash Crash.” Business activity began to slow late in ’61, and the market sell-off accelerated when President Kennedy threatened anti-trust action and went after the steel industry. After the fall, stocks rallied by 15%, fell by 10% and then began an advance that lasted until 1966.

Early in 1966, stocks began to sell-off, in a series of small waves. Eventually, stocks dropped by 22%, rallied by 9%, and then would fall by just over 10% for a total 24% decline from the top. During this period, inflation was beginning to emerge, there was sharply higher government spending, Vietnam, and a tight Federal Reserve that led to a credit crunch.

In October of 1969, stocks would fall by 31% without a rally of any significance. When the market hit bottom in late May of 1970, stocks would begin a rally. Inflation was beginning to pick up.

From March of 1974 to October, the S&P 500 fell by 39%. Stocks then rallied by 26%, and then a 17% market decline. This was punctuated by the oil crisis and stagflation.

There was an 18% decline from February through March of 1980, the market rallied from there until November. This period was impacted by the spillover effects of inflation from the 1970s, there was another energy crisis in 1979 due to the Iranian revolution and tight monetary policy. After the interim rally, stocks would fall by 29% until August of 1982. Initially, stocks traded up and down in a range before an 18% drop than a 16% rally, a 17% drop, a 13% rally, and then a 16% decline.

The market crash of 1987 created a 36% fall, followed by a 19% rally, a 14% decline, and then the rally.

There was a 20% sell-off from July of 1990 until October, followed by a 13% rally and then a 7% decline. The Fed had raised interest rates in previous years, and an oil price shock due to the Iraqi invasion of Kuwait.

In 1998 stocks dropped by 22% from July until October. In between, the initial decline was 21%, the up 14%, and then down another 14%.

The 2000 crash led to a series of declines, rallies, and then further declines that ran through 2003.

Like in 2000, the Great Recession of 2007-2009 also had a series of rallies and declines.

In 2011, stocks fell by 19% followed by a 12% rally, then a 12.6% decline to a new low, then up 20% and down 10% before a sustained rally.

Finally, in 2018, there was a 20% decline in the last quarter of the year. Stocks rallied from there, and never retested the low.

Which leads us to where we are today, a 35% decline followed by a 30% rally. Net net,  the market is down about 17%.

Of the 17 market declines we have shown above, the initial low was tested 12 times and that low was broken 11 times. Of the six times where the initial low was not tested, there was a sell-off of greater than 10% after the initial rally four times. Of the remaining two declines, in 1990, there was a 13% rally and then a 7% sell-off. The only time there was not a subsequent sell-off after the initial rally was 2018.

And then, if you look at the time periods, when there was a major economic downturn, 1929, 1937, and 2007, stocks had a substantial sell-off after the initial decline.

There are a lot of differences between now and the 1930s, mainly the aggressive government intervention and that medicine could put an end to this at some point in the next year or so, and we outlined some of the bullish case up above, but given history, there is a good chance the market we will test the lows (maybe break them) or come close to it.










Week Ending 4/10/2020


  • An incredible rally of 12.95%.
  • In five of the last seven weeks, stocks have been up or down by at least 9.5%.
  • US equities are now down only 14.83%.
  • Looking back at the 1930s and 2008, there can be significant declines after big rallies.
  • Economic numbers are simply terrible, 6.6 million file for unemployment and 16.8 million over the last three weeks. 10% of the workforce is unemployed.
  • But the Fed and the government are providing massive support and stimulus.
  • A possible plateau in new cases.


US stocks rallied by 12.95% and international stocks were up by 8.58%. For the US, it was the second time in the last three weeks that the market rallied by more than 10%. Looking back over the last seven weeks, stocks have either fallen or increased by more than 10% four times. And that does not include the week ending March 13th, when stocks just missed the 10% mark, falling by 9.74%, so if you round up that would be five of the last seven weeks.

Remarkably, for the year, stocks are now down only 14.83%, right between the 14 and 18% that they have fallen during previous pandemics. Of course, the previous pandemics, outside the Spanish Flu in 1918, have not been as severe as this one, and we would expect more volatility and more downside.

The VTI (US Total Stock Market) peaked on February 19th at $172.17, then fell to $111.91 on March 23. That was a drop of 35%. On Thursday, the VTI closed at $139.36, up by 24.53% from the low. So in that span of 50-days, equities have had a bear market (greater than a 20% drop) and a bull market (greater than a 20% rally), simply amazing.

However, based on history, that kind of wild volatility is not exactly an all-clear signal. In 2008, there was a rally of 12.03% and then of 6.76% a few weeks later, in the midst of a continuing bear market.

And in the Great Depression, there were massive declines and rallies over a 2-1/2 year period between September of 1929 and March of 1932. In the chart below of the Dow Jones Industrial Average, by our count, there were 13 declines and rallies of greater than 15% until the market hit bottom, and most of the percent changes were much greater than that.

We don’t think we are going into a long-term depression like the 1930s, but at this point, we don’t think this is going to be a V recovery and we would expect more downside. Hopefully, we are wrong and stocks can stabilize and/or go up, but we would not count on it. Of course, no one knows. Equity investors should be thinking with a longer time horizon of at least 3-5 years. If your timeline is long-term, market declines are opportunities to take advantage of in small increments based on your overall risk tolerance and the appropriate capacity.

Jobless claims came in this week at 6.6 million, down from a revised number of 6.9 million the previous week. Total claims over the last three weeks are now 16.78 million. These are numbers never seen before. Auto sales for March were down by 35%, and April will be much worse. The Michigan confidence index dropped by 9.5%.  It is estimated that 10% of the US workforce is now out of work. That is what happens when you intentionally shut down the economy. Again the numbers will get worse from here at least over the near term.

On the other hand, the Fed continues to rollout program after program to support the economy. No one will ever say the Fed did not do everything possible to help. The government is supporting the economy with massive fiscal stimulus and more is on the way. The long term impact of all of these measures is up for debate, but this is one of the big distinguishing characteristics compared to the 1930s. The other one is that this slowdown was mandated by the government and that there should be an end date, when therapeutics and a vaccine end the epidemic. The question is how much damage has been done by then and how quickly can the economy recover.

The USA might be plateauing in the number of new cases. It would appear the new case count is taking on the shape of a flatter bell curve as opposed to a steeper curve, which was the objective. USA cases did hit a new high on Saturday, which obviously is not good.

But despite that, if you look at a 7-day moving average, the US might have hit a peak. We emphasize the word might.

The US needs to get the economy moving again, even if it is in slow-motion at first, as soon as it is safely possible.