Update -- April 17, 2020

Gunther Kruger - Apr 17, 2020
Here's an update on the markets, economy and virus as of April 17, 2020.

Update – April 17, 2020

 

Hello all,

 

We thought it would be timely to provide an update to our previous status reports (for past reports see https://www.krugerlainegroup.com/blog/). We continue to work from home and will likely do so for yet another couple of weeks. But we remain fully functional and it is business as usual, at least as far as current circumstances permit. We are reminded of the old Chinese curse, “May you live in interesting times”.

 

Overall markets have firmed up since we last wrote in large part due to the unprecedented actions of the US government in terms of stimulus and Federal Reserve support for US credit markets. The latter deserves special mention since it was announced last Thursday. In essence, the Fed has provided a backstop for US corporate bonds both Investment and High Yield. This unprecedented action will have the effect of shoring up US credit markets and reducing the risk for large scale bankruptcies of some companies close to the edge. This is a positive thing in the short term as it reduces systemic stresses.

The longer term implications of this has yet to be determined as we move through this crisis. In Canada the Bank Of Canada has begun to move into quantitative easing measures and it is buying certain credits to increase systemic liquidity. This too is positive in the short term and new for the Bank of Canada (they did not employ this strategy in 2008/09 like the US did). In addition, the shutdown has resulted in a significant demand destruction for oil and WTI is currently trading at $20.00. Low oil prices will be with us until demand increases as economies gear up. Saudi/Russian price wars have been put on hold for the time being. Having said that, $20.00 oil is an unsustainable price as no one, but no one, can make this number work in 2020. That which cannot last forever won’t.

 

There remain two parts to this crisis. One is the health crisis. The other is, of course, the resultant economic crisis.

 

On the health front it is apparent that lock-downs and social distancing measures are having a positive effect as hardest hit areas, like New York State for example, seem to be reaching an apex. Much feared overwhelming of the health system has largely been averted and new hospital admissions are leveling off. In Alberta we have 2,000+/- confirmed cases and 48 deaths. Our Premier Kenney is talking about a shutdown to May 31st subject to data driven revision. Other parts of the world that were hit earlier are, in part, beginning to think about a relaxation of their own lockdown provisions. At the risk of being premature and not accounting for a second wave of this Pandemic it looks like we are moving through the worst of this.

 

This then brings us to the second part of the crisis and the economic impact of this on markets. Over the past 9 sessions US markets have been in a trading range of about 6-7%. In Canada, the resource rich TSX has been in a trading range of about 4%. We are seeing daily 500+ point moves and nutty moves like these are consistent with bear market volatility. The VIX (a volatility measurement) is trading at slightly below 40 which remains high, but it was at 80 one month ago. Some positive news, the VIX has crossed below 40 a total of 29 times since 1990 and 93% of the time that it does this, the S&P500 is higher 6 months later by about 17%. Markets are reacting positively to the level of government intervention around the world and to the anticipation of moving down the pandemic curve and a relaxing of business restrictions.

 

We sense that we are reaching an inflection point. The White House yesterday unveiled their 3-phase strategy for re-opening the economy. And it looks like this:

    • Under phase one, restaurants, gyms, movie theaters and large sporting venues can reopen if they adhere to strict social distancing requirements, though bars and schools will remain closed. All vulnerable individuals should continue to shelter-in-place. However, conditions must be met before states can adopt phase one, including meeting a "gating" criteria that includes a 14-day downward trend in cases or a downward trajectory of positive tests as a percent of total tests within a 14-day period.
    • Under phase two, states with no evidence of a rebound must satisfy the gating criteria a second time. In this phase, schools and activities like day care centers and camps can reopen and non-essential travel can resume. Bars can begin operating with diminished standing-room occupancy. Venues allowed to operate in phase one can moderately ease physical distancing requirements. All vulnerable individuals should continue to shelter-in-place.
    • Under phase three, states with no evidence of a rebound must satisfy the gating criteria a third time. In this phase, vulnerable people can resume public interactions but practice physical distancing. Low-risk populations should consider minimizing time spent in crowded environments. Larger venues can operate under limited physical distancing requirements. Gyms can operate if they adhere to standard sanitation protocols and bars can operate with increased standing room occupancy where applicable.

Here in Canada we’re not that far along but it will be the Premiers who will be driving the bus on this front. Saskatchewan, which has a grand total of 303 cases is beginning to talk about a lifting of restrictions.

 

The focus now is likely to shift form the Pandemic to economic recovery and markets will react to this news in both positive and negative ways. There will be a battle royale between those who want to extend the lockdown and those that want to re-open now. Following the US model, we suspect that it will be a phased in recovery on a region by region, industry by industry basis. No one is going cruising anytime soon. What is not known, and cannot be known at this time is how long it will take for economies to regain their footing and we are watching closely for concrete signs that this process has at least begun before making buy recommendations. We are data driven and of late, what data there is has not generally been good. But it is also important to remember that markets will not be overly concerned by this quarter earnings (which are toast), or even next quarter earnings as anticipated results will already have been “baked in the cake”. Markets will be concerned about a Q3 recovery and beyond. The market knows that 22MM Americans and 1MM Canadians have filed for unemployment benefits in the past few weeks. It will want to know how many of them become re-engaged and how quickly. There have been some positive developments overseas overnight as well with China and Singapore showing signs of V-shaped recoveries. Boeing has announced that it will be opening up a Seattle area plant at the end of next week adding back 27k workers. The PGA tour has announced a men’s tournament for June 11-14th in Ft. Worth. It’s a start.

 

In the coming weeks it will be timely to re-examine portfolios on an individual basis to ensure that they are positioned in the best possible way to take advantage of opportunities as they arise (our view). Conversely, if this shutdown morphs into something even more protracted and yet more ugly we’ll be making those recommendations as well.

 

As always, we are here to address your questions and concerns. Do not hesitate to reach out. Thank you for your continued support.