These are scary times for equity investors. The S&P 500 is down 22.6% this year, although last week experienced a relatively weak calm of 2%, thanks to three days of increases. This is a big improvement from the dip that has taken place since the February 19 peak two weeks ago, when the index lost a third. The market may have stabilized more or less for the time being, although more ill health and economic news could take over the market downturn.
Meanwhile, do we have anything positive and lasting to look forward to with the spread of the virus and the increasing number of deaths? That’s why we asked two of our favorite market masters, Nicholas Atkeson and Andrew Houghton, the founders of Delta Investment Management in San Francisco, for their reflections:
Larry Light: What are your thoughts on the epidemic and the market right now?
Nicholas Atkeson: COVID-19 requires some people, including healthy young people, to require intensive care and ventilation. We do not know in advance who will suddenly need intensive care. Most people with COVID-19 have minor symptoms and recover at home.
Like a person infected with COVID-19, the grant may or may not suffer a new setback. For now, the Federal Reserve and Congress are applying treatment to maintain market stability.
Congress passed CARES and the Fed cut the federal funds rate to zero, re-launched unlimited asset purchase programs, reduced reserve requirements for banks, expanded asset purchase program, re-launched asset-backed securities lending, launched new business credit facilities and authorized municipal debt to be used as collateral by money markets.
Light: And the prospects?
Andrew Houghton: There is very little visibility on how the events will unfold and on the market reaction in the coming weeks and months. On the positive side, it seems that the growth rate of infections and deaths in the United States is slowing down. We will soon be able to test at home to see if we have had COVID-19. If antibodies were detected, the presumption is that we would be safe from further infection.
On the negative side, unemployment is skyrocketing at an unprecedented rate and many sectors of the economy are in depression. Initial weekly requests were reported this week at 6,648,000 – 10 times the number of peaks during the recessions of 2002 and 2008 and 20 times the average of the past 53 years.
Atkeson: The stock market is still at a very high temperature with the CBOE, or VIX, volatility index above 50. But at around 51 years of age, it is well below its recent peak of around 85. S ‘ if it fell below 50, it would be a positive technical indicator and help confirm the recent strength in stock prices.
As the S&P 500 is down from the March 23 intraday trough, the index rose about 12.5% until Friday’s close. The forced sale has clearly decreased. Insider buying reaches its highest level since March 2009. Insider buying provides an informed opinion on the valuation.
Light: What about energy, which has been lagging the market for quite some time now?
Houghton: The energy sector has been hit by both a collapse in demand and a war over oil prices. The sector, as measured by the Energy Sector ETF, was down 62% from the start of the year to its March 18 low. Since the bottom, it has rebounded by almost 30%. The main oil-producing countries may reduce production in the short term and stabilize oil prices at a more economically stable level. It would be constructive for share prices.
Light: What about bonds?
Atkeson: Credit markets are open. At the heart of the storm is Yum Brands, which owns Pizza Hut, KFC and Taco Bell. The company sold $ 600 million worth of bonds on Monday in a deal that was four to five times oversubscribed. Given the strong demand for bonds, the company increased its supply by $ 100 million. Carnival Cruise Lines sold $ 3 billion of senior secured tickets this week. Investor demand was so strong that the company raised $ 4 billion at a lower interest rate than originally proposed.
Light: It means something to a cruise line that has been at the center of many virus headlines. While more bad news is surely waiting for us on the disease front, at least let’s hope the markets have experienced the worst.