Weekly Market Commentary





March 23, 2020



What's in this week's report:


• What you need to know (in plain English)


• The Corporate Bond Bubble is Bursting


• Should we move to cash?





What You Need to Know (in plain English)



Similar to last week, I’m going to focus on the March data that’s coming this week, because the February data is obsolete in this new economic “normal.”


Given that, the two most important reports to watch this week are the flash PMIs (out already in Europe and coming later this morning in the U.S.) and weekly jobless claims (out Thursday). These will be the most real-time indicators of economic activity and as we said, we expect them to be bad. But that very negative expectation leaves some hope for a not-as-bad-as-feared surprise, so we will keep our fingers crossed.


Two other notable reports this week will be the University of Michigan Consumer Sentiment Index (out Friday) and the Bank of England decision on Thursday. Consumer sentiment will give us a real-time gauge of the damage that is being done to consumer spending (which is the engine of growth for the U.S.), while we expect the Bank of England to potentially provide more stimulus (but at this point that’s not a bullish gamechanger).


As mentioned, I’m not going to spend too much of your time talking about the February data releases this week, which include Durable Goods (Wednesday) and Personal Income and Outlays (Friday), because again so much has changed since this data was collected that it really won’t be that useful.


Bottom line, there is one central question we are all trying to answer: “How bad will it be?” Markets have priced in “very bad” at these levels, which is of some comfort—but we won’t know how much until we get more March data. The sooner we can answer “How bad will it be?” the better idea we’ll have for where is “fair” value for stocks, so we will be watching closely.


The Corporate Bond Bubble is Bursting


I’m not going to mince words here: The corporate bond market is imploding on fears (legitimate or not) of mass defaults and bankruptcies.


What has changed since last week is that the coronavirus case count is exploding higher, and while there is positive progress from Washington on a Fed and Treasury level, the acceleration in the number of coronavirus infections coupled with the skyrocketing number of corporate shutdowns, layoffs and production freezes has accelerated to the point that the market is demanding Washington move faster. Put simply, the perceived economic fallout from the exploding case count is moving much faster than policymakers in Washington, and this week’s market meltdowns are not-so-subtle ways of the market telling Washington to hurry up.

So, despite the Fed’s efforts, the corporate bond bubble Is bursting. Corporate debt is the new sub-prime, in that it is at the heart of the crisis striking markets.


Investors want the Fed buy corporate bonds to steady the market. Currently, the Fed is not legally allowed to buy corporate bonds. THAT NEEDS TO CHANGE NOW IF THEY WANT MARKETS TO STEADY!

In last Sunday’s Fed actions Chairman Powell didn’t say they were seeking the authority to buy corporate bonds, and markets were disappointed. This is why. Former Fed Chairs Bernanke and Yellen both made this point in a recent FT op-ed. This is well known, and it needs to happen if the government wants to steady markets.


To arrest this corporate bond panic infecting the rest of the asset markets:

• The Fed needs to up its current QE plan and include buying corporate bonds to stabilize this market and stop the panic infecting asset markets.

• Congress needs to pass the $1 trillion bailout package that includes backstops for the travel and leisure and hospitality industries (hotels, restaurants, airlines, cruises, etc.). That will alleviate the solvency concerns that are the reasons corporate bonds are collapsing.

• Finally, the U.S. government needs to put full pressure on the Saudis and Russia to stop the oil war.


These steps are no great secret. If I know this is what needs to be done, then I assure you those in Congress, Treasury and the Fed know it too.

Markets are detached from reality and panic is running wild. And just like we knew TARP would stop the financial panic, we also know this will stop the corporate bond panic.


The longer it goes without happening, the greater the likelihood that this panic causes long-lasting damage. If companies can stay in business, then they will be in a position to re-hire once demand returns. If the owners of the company (shareholders, private and public) are wiped out, then they won’t have any capital to open the new business once the coronavirus panic is over.


As we and others have said, the ultimate bottom in this market will only come when the coronavirus growth rate peaks, but that’s likely still weeks away. But Washington can stabilize markets until that occurs, and the three steps above need to be taken, and soon (the first two being the most important). Until those occur, we can expect more volatility.




Should we move to cash?


After witnessing the carnage last week, bailing and going to cash might seem like the safe play, and advisors need to make those decisions based on each client’s tolerance for volatility and the need for capital. Personally, I am not going to cash. Here’s why.


Amidst this panic, I am constantly reminding myself this is a temporary phenomenon. The coronavirus will end, either naturally or at the hand of pharmaceutical companies. An anti-viral drug that alleviates symptoms will almost certainly be on the market in the coming months, and a vaccine will likely be developed in a year or so. Meanwhile, it remains possible that the virus follows a seasonal pattern and ends largely via social distancing and time. The growth rate of this virus peaking is the ultimate bottom for this market. Following the financial crisis, banks lending again signaled the ultimate bottom. The latter took years, the former likely won’t.


As mentioned, there is a “cure” for this current market volatility: QE that includes buying corporate bonds and a large stimulus package to help ensure corporate solvency. That could come this week, but having been through two crises I feel confident the government will again act as they need to stabilize markets. Put differently, we all know the solutions, so I highly doubt they choose not to employ them and send the economy into a depression.


These two factors (temporary negative influence and impending massive stimulus) set up the possibility of a “V-shaped” recovery in markets. So, if I abandon equity in good companies, there is a chance I miss the recovery.


Bottom line, the past week has been scary and painful and has elicited emotions last felt during the summer and fall of 2008. That doesn’t even include the strange world around us. For everyone, they need to do what will help them sleep at night, and if that’s raising cash, then so be it.


However, I want to make sure that we are presenting both sides of the trade, so you can make the most informed decision you can. Things are bad. They are deteriorating quickly. This is as bad as it’s been since summer/fall 2008. But just like there was back then, there is a path to recovery here, and logic tells us that’s more likely than not (at least for now).