Market perspective 4/11/2020

Financial market repair is not necessarily a smooth ride. Stock markets tend to move like a pendulum, swinging from side to side, spending a rare amount of time in the uneventful middle. What we know from history is that volatility, both to the upside and downside, tends to be clustered together in time. When markets are volatile, the pendulum swings faster. More specifically, big down days (or weeks) and big up days (or weeks) tend to occur close together. Volatility is partially the result of market participants adjusting prices based on new and substantial information. Also partly due to human behavior, i.e., fear of the unknown, which we won’t spend much time on here. When the rate of change in information is high, often so is the rate of change in market levels.

February 19th marks the high in the US stock market (S&P 500), and as of this writing, March 23rd marks the low. During that record-breaking short period of decline, there were dislocations in the market; a challenging time for long-term investors. Since March 23rd, we have started to see some market repair. Lower risk bonds, for example, have now been behaving like lower-risk bonds again as substantially more liquidity has been put into the market. We have more recently seen a reduction in volatility and trading volumes, implying less algorithmic (automated, pre-programmed) trading and possibly less emotionally-charged decision making (our speculation only). Restated, the trading volume, which is a measure of market activity, while still elevated, has declined from the highs experienced late March.

Updates on the week:

• Major market indices made big gains during the holiday-shortened week

  • Some areas of the stock market that declined the most in March also experienced the largest price increase since the March 23rd lows; the pendulum swinging back

• The Federal Reserve announced it would inject another $2.3 trillion into programs supporting businesses, states, and municipalities

  • At times we can get numb to the “trillions,” but this was a big deal in terms of repair which the market reacted favorably towards

• Not always front-page news, but still relevant is the ongoing oil price/supply war occurring between Russia and Saudi Arabia

  • Oil prices have been volatile and remain near 15-year lows

  • A tentative deal put in place to scale back on production was met with disappointment by the oil market, likely due to the short term, 2-month nature of the deal

• New jobless claims were filed by 6.6 million people, which puts the past four week total to around 17 million jobless claims

  • This marks an all-time high in jobless claims

  • This high was expected given the US economy has largely been halted due to precautionary COVID-19 measures

We believe recovery will occur as the markets “re-forecast” the how-and-when of coming out of this, AND we see a reduction in uncertainty. More market repair is still needed and it is possible that market prices will decline to make new lows again before we are in the clear. The pendulum will continue to swing during the recovery process.

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