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  • The Seville Reporters

In Focus: Market Recovery Pt.1

On April 17, 2020 the S&P 500 closed up for the second week in a row. After the major market sell off that started February 20, 2020, and wiped out three years of market gains in a month, a normal person would think that all investors would rejoice two weeks of bullish markets, but that's not the case.

Wall street is divided on the current state of the markets. Some investors believe the market lows of March 23, 2020 set the bottom for the coronavirus market sell off. Since putting in that low, the S&P 500 has risen just over 28% as of April 17, 2020. On the other side of the coin, some investors believe that the markets quick rise is too much too soon, and the rally will peter out sending the markets to revisit the low from March 23, or even worse make new lows.

It took the S&P 500 all of 2019 to increase 30%, and the S&P 500 recently moved 28% higher over the last 18 trading days. Is that type of move in the markets sustainable? Can this recent market momentum take the S&P 500 back to where it was on February 19, 2020 (3,386.15)?

The likely answer to both questions is no. This move is not sustainable, and this current momentum will not take markets back to their all time highs.

When I think of what's taken place over the last 18 days, I still remain very pessimistic about this short-term market bounce. When I consider what's taken place since March 23, there were very few things that warrant an optimistic mindset towards the markets in the short term. The Global number of coronavirus related deaths have jumped from over 16,000 to over 153,000 between March 23 and April 17 according to OurWorldData. There are grumblings, but nothing official that China severely understated the number of deaths caused by the virus, and that the country's death toll alone could be in the millions. States are still fighting or testing kits and ventilators. Unemployment continues to move up quickly, with over 6 million U.S. workers filing for unemployment benefits two weeks ago, and another five million plus filing for benefits last week. In addition to the unemployment number continuing to increase, the stimulus money earmarked for small businesses has run out. Places like Japan and Singapore are seeing a second wave of COVID-19 cases in their country; and while shelter-in-place has worked in parts of the U.S. to slow the spread, other parts of the U.S. are fighting their local governments to resume their normal lives, which could put many who are trying their best to stay safe in jeopardy.

What bullish investors have gathered over the same period of time is that the number of coronavirus cases has peaked, and that the curve is flattening. These same investors have also been enthusiastic about President Trump's ideas of reopening the economy in the very near term. The Federal Reserves' save the economy at all cost approach has also given investors reason to get bullish. Also, the unemployment number dropping from six million two weeks ago to five million last week has sparked a small part of the bull run. In addition there is also the news that Gilead Sciences' (GILD) drug remdesivir has seen favorable results in treating people with COVID-19. In my view the news coming out of Gilead is the only thing to be somewhat excited about, I believe overreacting to curve flattening could lead to more unexpected market losses for overly bullish investors in the near term.

The fundamentalists in me wants to say markets aren't currently reflecting the underlying fundamentals, but if I'm honest with myself markets haven't reflected the underlying fundamentals for some time. Prior to the pandemic Apple shares traded to over $320 per share based on the iPhone + 5G story, which was and is a very weak story. None the less investors piled in. The Seville Report has been holding Apple since early 2018 and bought more in late 2018, and early 2019. I wasn't complaining that so many investors wanted to give me $320 for something I paid $160 for, but it was the moment I realized investors are grasping for anything to invest in a big name.

I should admit though that I am like the crazy scientist at the beginning of the movie telling you something bad is coming and that now is the time for overreaction. I don't feel we're anywhere close to being all-clear from this pandemic. I also think any move to rush back to normal will result in governments making things worse for themselves and their citizens.

Many investors and market strategists continue to look back at 2008 and 2009 for the signs that signaled March 9, 2009 was the bottom of the Great Recession. In 2008-2009 the economy still functioned, stores were still opened, people who had the means could still go to restaurants, bars, and the movies, those with less means didn't stop going to restaurants, bars, or movies, they just skipped the appetizer, ordered one or two less drinks, and saw the matinee.

Our current situation is vastly different. NYC looks like a ghost town. Those with and without means have been ordered to stay home. Those people with means will have money to spend when stay-at-home orders are lifted, but they may have fewer places to spend their money. Those with little means could have even less when stay-at-home orders are lifted, and they could be facing a tougher job market than the one that existed a year ago.

Shelter in place isn't stopping everyone though. Some restaurants have been able to make a go of it by doing deliveries, but bars are closed, clubs are closed, movie theaters are closed. This pandemic has hit the service industry and its workers especially hard. Overly bullish investors are investing now on a "this is the worst it can get" thesis and I don't think that is at all true.

I still believe we will have a financial fallout after it's all said and done, and any move to shorten shelter in place guidelines in an attempt to restart the economy will make the financial fall out on the back half of this pandemic even worse.

The millions of unemployed American's won't be rushing out to buy the iPhone 12 or the Surface Pro this year. Christmas will likely look a little different, with retailers doing less business on Black Friday and Cyber Monday than they had in past years. The instant economic snap-back that investors are eagerly anticipating and betting on isn't what I see happening, and that is why I'm still cautions about going all in, or claiming we've hit a bottom.

But Still Investing

I'm still investing though, I've never been an investor who tries to time the markets. I've been taking small bites of the stocks that were featured in our latest quarterly newsletter. I've moved some money into oil using the United States Oil Fund (USO) as my investment vehicle, because I don't think WTI crude oil stays under $20 per barrel forever. I've taken small bites of some beaten down bank stocks. Thanks to deregulation, banks are into everything, and in the U.S. if you want to live the American Dream, you'll likely need a bank to do it. Uber (UBER) has also made my hit list of things to buy on the cheap. I'm nibbling at the markets because my theory that things will get worse could be wrong.

This current divide in Wall Street is just one more in a long line of disagreements investors and analysts typically have. I'm on the side that believes this current rally in markets is too much too soon and not supported by the available information, scientific or economic.

I'm not telling investors not to invest here at these levels, but I am giving a warning to proceed with caution. The decisions made over the next few weeks by governments can make this another month or two of hell or another four to five months of hell, and at four or five months of shelter in place, the U.S. economy could take years to recover.

Invest with your head and not over it, and please stay safe.

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