From a Ripple to a Tsunami
Last week in this Commentary, I warned of the possible ripple effects of the coronavirus on the economy and the markets. In just a few days, the coronavirus’s effect on the economy and the markets has gone from a ripple to a tsunami. Businesses are shuttering, events are being cancelled or postponed, grocery store shelves are empty, and people are being asked or ordered to stay home. The markets are now deep in bear market territory. The effects on the economy, even given the short time that the economy has been retreating, may be with us for a long time.
Given these events and the rapidly deteriorating situation, I would caution not to panic. The economy and the markets will get better. This is not the first time we have been through situations like this. In the 53 years that I have been investing (38 of those years as a professional investor), I have been through several major market downturns sparked by events and market environments such as 911, the Dot.com era, the financial crisis, and many more). Keep a level head and a realistic perspective on what is happening. It is bad – there is no doubt about that – but it will turn around. The real question is when will it turn around? No one knows that at the present time. But it will turn around. The most important consideration at the present time is to keep everyone healthy. Then we can worry about the economy and the markets.
For now, review your investment portfolios. It is highly likely that all or most of your stocks are down. You should not consider selling the bulk of your stocks – only consider selling companies that are not sound companies. But do recognize that as the economy deteriorates, even good companies will be affected.
For stock market value hunters, we believe it is still too early to jump back in. We will be closely monitoring the markets using the many tools and models that we have developed over the years to assess the economy and the markets. We will use our best judgement and thoughts to let you know when we believe things are turning around. The turnaround hasn’t happened yet.
Finally, I would like to share with you an article I wrote in March of 2016. I have reprinted this article below as a special report in this Commentary. The article clearly highlights the value of long-term investing. Again, please don’t panic and have confidence that the world will be in a better place in the hopefully not too distant future – but it will get better.
Economic and Investment Highlights
Last Week
Oil prices again slid to their lowest levels since 2016 after Saudi Arabia said it plans to cut prices and the battle on oil prices between Russian and Saudi Arabia escalated.
The Dow’s 11-year old bull market officially ended this week.
The U.S. budget deficit totaled $625 billion in the first five months of the current fiscal year. This was a 15% increase over the same period in 2019.
Trump announced a 30-day ban on travel from Europe.
The NBA suspended its season due to the coronavirus.
The Dow posted its worst day since 1987 earlier this week. All three major indexes – the Dow, the S&P, and the Nasdaq – sunk into bear market territory.
The ECB’s Lagarde unveiled a modest stimulus package for the ECB.
Australia said it would spend $11.42 billion in an attempt to fight off a recession in the country.
Trump declared a coronavirus national emergency in order to free up billions of dollars in assistance and allow him more authority to act rapidly to combat the virus.
Investors are dumping stock funds and going into government bond funds at a record fast pace.
The Fed cut rates to near zero on Sunday and unveiled other measures, including plans to buy $700 billion in Treasury and mortgage-backed securities, aimed at stabilizing markets. The federal funds rate is now targeted at between 0% and 0.25%.
Small business confidence fell in March to its lowest level in seven years.
The Dow, the S&P 500, and the Nasdaq all fell for the week. The Dow was down 10.4%; the S&P 500 was down 8.79%; and the Nasdaq was down 8.2%. The 10-year treasury yield ended the week at 0.946%. Gold closed at $1,515.70 for the week. Oil closed at $31.73 for the week.
The Week Ahead
This link takes you to Econoday’s Economic Calendar and Economic Events and Analysis which shows the upcoming economic reporting events scheduled in the week and months ahead.
Summary
Note: The comments that follow are derived from the economic indicators referenced in the Resources section of this newsletter and other sources in this report.
The Aruoba-Diebold-Scotti Business Conditions Index (ALS) has been trending up the last several weeks from having dipped in 2019. This is a positive indicator for the economy on a short-term basis.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2020 is 3.1 percent. This reading continues to support the ALS model assessment of an improving short-term economic environment.
The New York Fed Staff Nowcast stands at 1.6% for 2020:Q1 and 1.1% for 2020:Q2.
The Chicago Fed National Activity Index (CFNAI) showed an increase in economic activity in January. The Chicago Fed National Activity Index (CFNAI) was -0.25 in January, up from -0.51 in December.
All told, these short-term economic indicators are a neutral to positive analysis for the economy, at least on a short-term basis.
Expectations that stock prices will rise over the next six months is now at 29.7% in the latest AAII Sentiment Survey. The historical average is 38.0% for the survey. 19.0% of the investors in the survey described their short-term outlook as neutral and 51.3% were bearish. Please see the AAII Sentiment Survey for the complete results.
The latest Gross output (GO) reading suggests moderate economic growth as we enter 2020.
On a longer-term basis, the forecasters in the Philadelphia Fed’s Survey of Professional Forecasters (as of February 14, 2019) predict real GDP will grow at an annual rate of 1.7 percent for the first quarter of 2020, 2.1 percent for the second quarter of 2020, 2.0 percent in the third quarter of 2020, 2.1 percent in the fourth quarter of 2020, and 2.2 percent in the first quarter of 2021. On an annual-average over annual-average basis, the forecasters predict real GDP to grow 2.0 percent in 2020, 2.0 percent in 2021, 2.0 percent in 2022 and 2.0 percent in 2023. The forecasters predict the unemployment rate will average 3.6 percent in 2020, 3.6 percent in 2021, 3.7 percent in 2022, and 3.9 percent in 2023.
For a more in-depth review and analysis of the economy, please see our mini-book on economic analysis and forecasting entitled: Simple and Effective Economic Forecasting.
Stock Market Valuations
Our estimates of the market valuations for two stock market indices, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500), can be found in the file below:
Conclusion
Up until the past week, the economy had been in a stable but somewhat vulnerable state. Nonetheless, it had remained fairly strong. In fact, robust consumer spending and strong labor market conditions had given us confidence that the economy, now in its tenth year of expansion, could continue to grow. But we were cautious on this outlook. There were several reasons for our caution. U.S. business growth had been mixed. And global economic growth had been mixed as well. The new coronavirus was becoming a global economic threat, although it was still too early to tell how much of an effect it wiould ultimately have. Debt is at high levels for consumers, businesses, and government (at all levels). Finally, this is an election year that will likely have significant consequences either positively or negatively depending on the outcome of the elections. And of course, it is still too early to tell what the outcome of the elections will be.
As discussed above in the lead article, the affects of the coronavirus have gone from a ripple to a tsunami. There is now a much greater risk of a recession. The government, the Fed, Republicans and Democrats, and pretty much the entire country is trying to get the virus under control and is coming up with plans to mitigate the long-term economic effects caused by the virus. But the virus has impacted the economy, in a significant way, in just a short time. How long lasting the effects will be no one can tell right now. The economy has been largely shut down and remains so today. It takes time to restart the economy after a situation such as what is occurring at the present time.
We believe it is important to maintain a long-term view toward investing. But for now, just sit tight. Eventually, this means that you should continue building your investment portfolio using the Cassandra Stock Selection Model to select individual securities that offer growth and value opportunities.
Chart for Review and Thought
Simple and Effective Economic Forecasting Model
Notes (GDP Growth Chart):
- See the July 8, 2019 Commentary for an introduction to this model.
- Actual numbers 2007 through 2019; forecasted numbers thereafter.
- Normal GDP growth is typically in the 2% to 3% range.
- A recession is generally defined as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).
Announcements
Dr. Wendee spoke at the Investment Club of America’s annual economic summit, called Econosummit, on Sunday March 1, 2020 in Las Vegas.
Dr. Wendee attended the The National Due Diligence Alliance (TNDDA) investment banking conference, which was held March 6-8, 2020 at the Four Seasons Resort in Dallas, Texas. This is a conference held several times throughout the year for investment bankers and registered investment advisers to learn about new opportunities in the Alternative Investment asset classes.
We have been researching the use of crowdsourcing for investment ideas. We will be sending a survey out in the next few weeks to get your input on the economy and the markets; and to get any investment ideas that you would like to share. We will compile this input and distribute the results to you and our other subscribers.
Dr. Wendee has been researching and writing a new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics). The full paper on Intrinsinomics will be published in the near future.
Finance 3350: Personal Finance-Portfolio & Risk Management– Dr. Wendee started teaching Finance 3350 – Portfolio & Risk Management at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA.
Business 4970:Strategic Management – Dr. Wendee started teaching Business 4970:Strategic Management at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA.
Business 218 – Macroeconomics – Dr. Wendee started teaching Business 218 – Macroeconomics at California Baptist University (CBU) starting January 2020. Dr. Wendee teaches courses in Finance and Economics at CBU.
Dr. Wendee presented a paper on his new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics), at the International Leadership Association’s annual global conference which was held in Ottawa, Canada last Fall.
Dr. Wendee is working on a financial planning modeling program which will be available in the near future. The modeling program is designed to assist anyone in creating a financial plan and is customizable for each person’s unique financial planning goals.
Intrinsic Value Wealth Creation pyramid
We always conclude our commentary with a discussion of the Intrinsic Value Wealth Creation Pyramid. The Intrinsic Value Wealth Creation Pyramid is designed to show some of the major categories for building wealth. It is the result of many years of study of the wealth building process; experience working with clients who have built considerable wealth; and my own personal experience building wealth. Newsletter subscribers should consult the Intrinsic Value Wealth Creation Pyramid as one of many useful investment tools while considering their investment plans.
The chart in this section is an expanded version of the Intrinsic Value Wealth Creation Pyramid Chart referenced in the Forbes.com article entitled, Nine Of The Best Ways To Build Wealth.
RESOURCES
See our Resources section for links to economic and other resources used in the preparation of this Commentary.