by Zack Johnson

Wartime London was the childhood home of my wife’s grandfather Ross. Her grandmother Helen was also born in England, but her family moved to the States when she was two years old. The Germans began their bombing campaign against Britain when Ross was 13 years old. He remembered being bombed out of his bed on two separate occasions. Before the Blitz began, the British government, concerned about food rations being insufficient to provide for pets, formed a committee to address the issue. This committee published an advisement for all pet owners in London: “If you cannot place them in the care of neighbors [outside of the city], it really is kindest to have them destroyed.” This is probably why, when comparing our current global predicament to wartime London, Helen wittingly observed, “At least they aren’t making us euthanize our pets!” Her apt response certainly brings an interesting perspective on our current battle against this invisible killer in which we are united against. On a lighter note, our contemporary furry friends, like my own dog, seem to have a plenteous bounty of kibble, daily walks and immunity against COVID.

LEARNING TO EMBRACE BEAR MARKETS

While last week began with another disappointing day on Monday, the S&P 500 managed to produce a 17.6% gain over its next three trading days recording a 10.3% gain for the week. Meanwhile, U.S. treasury yields remained largely unchanged, and investment grade bonds made a drastic recovery.

Two items spurred investor optimism last week in the equity markets and restored much needed confidence in the bond market.

• A $2.2 trillion stimulus package which was unprecedented both in size and response time.
  • Fiscal policy response for COVID-19 equates to 10% of GDP. For comparison, fiscal policy action in 2009 equated to 5.4% of GDP.
  • I sent a summary of this legislation out over the weekend. I encourage EVERYONE to read it.
• The Federal Reserve stabilized the debt markets by slashing interest rates and infusing cash into the market.

The first key piece of economic data that was revealed last week was jobless claims. Prior to last week’s record 3.28 million of jobless claims, the previous record occurred in 1982 where 695,000 filed jobless claims. It should be noted that this increase is NOT the same as an increase in jobless claims during a typical recession. It is likely different considering:

• the pace unemployed people may return to work once social distancing countermeasures are lifted AND
• the incentives contained in the $2 trillion fiscal stimulus bill for companies to hire them back.

So, why did the market rally last week amidst demoralizing economic data?

Spencer Jakab addresses the issue in this weekend’s Wall Street Journal article entitled, “How I Learned to Stop Worrying and Love the Bear Market.” He states, “If you wait for happy headlines or hopeful government statistics for a clue for when to pounce, you’ll be too late. Stocks typically rally before a recession is over.” He finds that if an investor bought the S&P 500 (or its predecessor index) at the bottom of each bear market during the last 8 recessions (going back to the Great Depression) and sold as soon as the recession ended, her annualized rate of return would have been 64%.

Here are a few reasons the markets are rallying despite poor economic information:

• Much of the bad news that appeared in headlines last week was expected and already priced in. With a 34% drop in the S&P 500, investors were anticipating REALLY BAD economic data. Despite the market rally, it still seems to be pricing in a likely recession.
• Initial enthusiasm for the CARES Act. The bill provides much needed support for individuals, businesses and embattled industries (like airlines, restaurants and medical groups) and there is hope that it will stave off some of the worst-case scenario outcomes.
• The Fed is addressing liquidity issues in debt markets by easing the liquidity crunch taking proactive measures like purchasing investment grade bonds.

While we are always grateful for weeks like last week as they remind us again that markets can (and most often do) go up, we do expect more bad news ahead and continued volatility. Only time will tell if last Monday’s S&P 500 close of 2,237 will mark the bottom of this cycle, but history tell us that equity markets bottom out PRIOR to the end of recessions and WHILE unemployment is still rising.

ON LIVING IN THE AGE OF VIRAL NOVELTIES

We are facing something seemingly unprecedented… a looming “social distancing” recession caused by an invisible killer haunting our communities and economy. While elements of this crisis are unique, history serves as a reminder that the economic doomsayer’s dictum, “THIS TIME IS DIFFERENT,” simply does not square with historical fact. A good friend on the frontline at our local emergency department shared a C.S. Lewis quote with me that I will pass along as it reinforces this truth. I believe Lewis provides a framework for our mindset during this challenge filled with uncertainly, anxiety and fear. (Of course, this is meant to be applied in a figurative sense, and not as a literal prescription, as some of his comments do not conform in the new age of social distance.)

“In one way we think a great deal too much of the atomic bomb. “How are we to live in an atomic age?” I am tempted to reply: “Why, as you would have lived in the sixteenth century when the plague visited London almost every year, or as you would have lived in a Viking age when raiders from Scandinavia might land and cut your throat any night; or indeed, as you are already living in an age of cancer, an age of syphilis, an age of paralysis, an age of air raids, an age of railway accidents, an age of motor accidents.”

“In other words, do not let us begin by exaggerating the novelty of our situation. Believe me, dear sir or madam, you and all whom you love were already sentenced to death before the atomic bomb was invented: and quite a high percentage of us were going to die in unpleasant ways. We had, indeed, one very great advantage over our ancestors—anesthetics; but we have that still. It is perfectly ridiculous to go about whimpering and drawing long faces because the scientists have added one more chance of painful and premature death to a world which already bristled with such chances and in which death itself was not a chance at all, but a certainty.

This is the first point to be made: and the first action to be taken is to pull ourselves together. If we are all going to be destroyed by an atomic bomb, let that bomb when it comes find us doing sensible and human things—praying, working, teaching, reading, listening to music, bathing the children, playing tennis, chatting to our friends over a pint and a game of darts—not huddled together like frightened sheep and thinking about bombs. They may break our bodies (a microbe can do that) but they need not dominate our minds.”

— “On Living in an Atomic Age” (1948) in Present Concerns: Journalist Essays

The opinions expressed are those of Robert (Zack) Johnson as of the date stated on this material and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance and are not a guarantee of future performance. Diversification does not assure profit or protect against loss.