This has been one of the worst months in history for the stock markets. The economies around the world have come to a screeching halt and the majority of people around the world have been told to stay away from work and stay away from each other to avoid the spread of COVID-19 virus. While the first 3 weeks may have been the worst in history, the 4th week was the best since the 1930s, as we rallied off the back of government stimulus.
It is alarming to see some of the worst job reports numbers in history pop up as the US reported weekly jobless claims at 3.3 million last week and Canada reported 1.55 million over the past two weeks. This is what the market has been pricing in as governments have mandated a stay at home policy to combat the virus. This explains the extremely quick market sell-off as job loss was almost instantaneous vs. a normal recession when job loss is over a prolonged period of time 3 months to a year. Hopefully, this market retracement is a sign of how fast investors believe some of us will be getting back to work.
There are three main portions of this month’s market review to look at. Normally we enjoy looking at fundamentals, business plans and growth strategies of companies but right now there it seems there are only three things that matter.
2. Global Government Stimulus and Interest Rates
3. The oil war
This virus has taken the world by storm and to stop the spread we are all told to stay home. This means for many people not to go to work and for many employers that means they must choose between keeping employees and letting them go. If they let them go they can apply for employment insurance in Canada, which would give them an income for up to 15 weeks. This takes the burden off the small business owner and allows people to hopefully maintain their bills.
The main reason for the stay at home protocol is so that we can stop or slow the spread of the virus through “social-distancing” if the spread is stopped, it’s party time! Slowing the virus is the real goal and this allows for multiple benefits. While a small percentage of people who get the disease need hospitalization, a small percentage of a really big number overloads our healthcare system. By slowing the disease we hope to keep the number of hospitalizations minimal. Secondly, slowing the disease allows time for the creation of a vaccine (1-year expected timeline) and more importantly treatments for the disease. While a vaccine is far away, treatments are more readily available. There have been many drugs that have been successful in isolated cases and even vitamin C has shown great results in combating the virus, but further testing will need to be done to find the most efficient drug or therapy. Lastly, to give pharma companies time to ramp up production of products. With a common enemy, the world is ramping up production to create weapons to fight this enemy. Gloves, masks, hand sanitizer, ventilators are all in short supply but fear not, help is on the way. During World War II, Ford fashioned its plants to start producing B24 Liberator planes and ramped up production to create one every 63 minutes. Fast forward to today and GM has retrofitted its plants to mass-produce ventilators, something desperately needed for the very worst cases of COVID-19. Canada Goose has started creating hospital gowns and 3M has increased its production of N95 masks to a rate of 1.1 billion per year. So, not to worry in a week we will be slightly better suited to fight this virus, in a month even better and in 3 months far better than we are today. Therefore, the goal of slowing it spreading is paramount as help is on the way!
But is social distancing working? The best thing to do is begin by looking at countries that have instituted social distancing and seeing the progression. Let’s look in order.
1. South Korea – Started social distancing and testing in early February. They started tracking the infected and told them to isolate around February 20th, as you can see from the graph 10-14 days later the cases peaked and began to fall.
2. Italy – Is possibly the deadliest of all the breakouts with a very high mortality rate. They began social distancing nationally on March 9th and tightened that policy on March 11th. It is interesting to see about 10-14 days later the cases began to peak and flatten and begin to decrease afterward.
3. Spain – This is also a case of a very high mortality rate. They began a shutdown on March 14th. This would place them about 5 days later than Italy and the graphs look very similar, we are now about 16 days since their shutdown and we have seen flattening.
4. Germany – One of the most remarkable cases, with a low mortality rate and drastic decrease, they began social distancing of March 13th also. They appear to be already on the decline
5. Canada – Even though it feels like a decade we began social distancing on March 17th, or 13 days ago. Previous cases would indicate we are at our peak or flattening out period, our testing has been extremely slow and taken a lot longer than most countries to see a positive or negative result and our lockdown procedures are lighter than the Eurozone, but we should see cases flatten soon. In a small kudos to our healthcare system and workers, our mortality rate is extremely low.
6. US – Last and not least we have the US, who still have not issued countrywide social distancing, as each state operates independently and some still have not closed everything off. But, they are social distancing and seem to get serious sometime around the 20th, this would indicate in those areas that we should see some flattening this weekend, however without stronger containment, their infection curve will most likely be longer than most other countries.
This is a positive indication of things to come as most countries are seeing the same type of curve once they begin social distancing.
Government Stimulus and Interest Rate Cuts
We can debate the long term effects of governments printing free money and cutting interest rates to zero another time but for now, we will look at the short term impact on investments. Governments around the world have begun to print and give away free money to help their financial systems as employment has come to a crashing halt. Governments around the world have deployed about $4 trillion USD in aid, this is in the form of small business loans, unemployment aid, healthcare spending, bank loans, etc. This does not replicate what is lost from many people not working but certainly softens the blow. On top of this, there is an additional bond purchasing and asset purchasing program to prop up the financial system which amounts to several trillion more USD. Additionally, it is difficult to find a developed nation with an interest rate above 0.25% now. The exception would be South Korea at 0.75%, Norway at 1% and Denmark at 0.5%, so essentially a world of free money. In the past, this has always been good for stocks while these programs are in place. The chart below indicates in grey when the US injects cash into the markets.
Also, we get the inverse once the US Federal Reserve decreases rates. Once, the full decrease has happened we usually get an upward response in the market. Grey indicates a recession in the chart below.
As you can see the market does respond well to free money and low rates. Currently, there has never been more free money and global rates have never been this low.
The last event would normally take center stage but these are not normal times. Saudi Arabia and Russia are not budging in their attempt to crush the price of oil. As written in our previous articles this is not good for them in the long term as the price is below what is required to maintain their country budgets and they are two nations almost fully dependent on oil profits. But, in the meantime, they decided to take advantage of the situation and give the US a little more hurt, as US oil becomes very unprofitable at these levels. There has not been much progress on this front but President Trump is looking to have a meeting with President Putin to discuss possible solutions that gave oil a glimmer of hope in the past couple of days.
Once again oil is a two-sided issue and both parts needed to be solved in this equation. The first side is supply and Saudi Arabia and Russia and ensuring there is plenty of supply to bring the price of oil down, this will remain until there is some sort of political intervention that does not appear to happening soon. However many are hopeful for the future because this disruption has happened multiple times in the past and cooler heads have prevailed. The other side is demand. With everyone stuck at home, factories shut down and no vacations planned, demand is pretty low and this also puts downward pressure on the price. This hopefully will slowly begin to ramp up as COVID-19 cases begin to ramp down. Judging by the charts provided in this article, global cases ex. The US has begun to decrease but we will need a little more time before we are all released from our prisons.
Thanks for reading, stay safe, there is a light at the end of this tunnel.
Konrad, Justin, and Merriel
More articles and information is available at www.lkwealth.ca
Source: BCA Research, Bloomberg, Reuters, Yahoo Finance, Trading Economics
Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.
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