• The stock market experienced further declines last week, with the S&P 500 index declining 15%. This brings their 2020 loss to 28.3%.  The equal weighted S&P 500 index, which is not distorted by the mega-cap tech stocks, offers a more realistic view of the damage.  It has declined 35% for the year.
  • As can be seen in the chart above, the magnitude of recent market moves is unprecedented. The largest move was on Monday (3/16), with the Dow declining nearly 3,000 points.  It was the second worst day in history, only exceeded in the 1987 market crash.   Thousand-point moves on the Dow have now become the norm, not the exception.  The market has moved in excess of 4% on 13 of the 22 trading days since the panic began.
  • Most of the volatility is due to the fact we are in the price discovery phase of the correction process, and no one has the information necessary to construct a reliable economic outlook and hence the ultimate effect on corporate profits. However, it appears highly unlikely the 32% decline for stocks from their peak is commensurate with the corresponding hit to all future corporate profits.  We still believe the most likely outcome will be a two-quarter economic event with a strong V-shaped recovery, not a permanently disabled economy.
  • A sizeable share of the blame for the market’s recent exaggerated daily moves is the increasing use of quantitative trading strategies. The machines feed on volatility, and in their algorithms volatility equals risk.  The more risk in the system, the harder they sell.  The impact on the “up” days is largely due to momentum-based quant strategies.   In the end, the effect of such computer-driven trading is the price discovery phase has been connected to a powerful amplifier.  We are surprised there has not been a rallying cry to at least suspend the practice.
  • We have seen signs of credit market unrest emerge; corporate bond yield spreads have widened versus treasuries and it is taking more time when awaiting a fair bid for corporate bond sales orders. However, in the $1.2 trillion dollar high-yield market (e.g. highly leveraged loans and junk bonds – particularly in the energy sector) the spread widening and decrease in liquidity has been severe.  CCM has never participated in the “quest for yield” that led investors into this trap, and our high-yield exposure is effectively nil.
  • As has been our refrain from the beginning, we advise patience and staying the course with stocks. There is certainly the chance that equities will continue their fall.  However, in our experience we have rarely seen a panicked investor unload their equity holdings and after the smoke clears re-enter the market at anything but a higher price than they received on their exit.  In the vast majority of instances it an exercise in futility.

The situation is very serious at present, and this crisis cannot be wished away.  However, time has healed every economic and financial crisis in our history.  While others panic, successful long-term investors remain objective and optimistic.  As such, we offer some real signs of progress in the coronavirus fight, along with some encouraging signs for the future:

  • On the fiscal front, Washington is now fully engaged and is in a heated bidding war for who can compose the largest recovery/stimulus package. Stock futures are negative this morning in revolt of last night’s failed bill passing.  However, we fully expect a bill well in excess of $1 trillion this week (perhaps today) offering much needed assistance for households, hard-hit industries such as airlines, and aid to small businesses.
  • On the monetary front, the Federal Reserve is unleashing all of the stops. Interest rates were cut a full point to zero last week and a variety of quantitative easing packages have been instated.  Ultimately, the Fed will likely engage in direct lending facilities with corporations and small business that are unprecedented.
  • On Thursday and Friday, China reported no new domestic coronavirus infections. Indications are that after an additional 14 days of quarantine their industry will emerge from its slumber.
  • Singapore has had a good response from social distancing. “The most important lesson is that the virus can be contained if people are responsible and adhere to certain simple principles,” said local physician Dr. Christopher Willis. “Stay calm. For most people it’s like the common cold.”
  • A solid testing regime has been a key to the marked progress in South Korea, and there is a growing list of new kits that deliver results in hours instead of days. The U.S. initially stubbed its toe by not having tests available, but we will inevitably catch up.  As a testament to our ingenuity, the State of New York now offers drive-through COVID-19 tests.
  • There is progress on the vaccine front, with Moderna producing a candidate only 42 days after the virus was sequenced (a drug industry record). At least ten other vaccines are in Phase 1 or preclinical trials.  A vaccine available to the public is probable in the next 12-18 months.
  • There is already a long list of new potential treatments for the virus. Highlights include:
    • The most promising treatment appears to be Remdesivir from Gilead Sciences (a core CCM equity selection). Clinical data indicate effectiveness against COVID-19 and it is in Phase 3 testing.  It could be approved within months.
    • Ascletis Pharma is testing a combination of antivirals. The company last month tested on 11 patients with coronavirus-caused pneumonia.  All 11 were eventually discharged.
    • Both Eli Lilly and Regeneron are developing antibody treatments for coronavirus infection that may be available within four months. Antibody treatments were highly effective during the Ebola outbreak.
    • There are reports the anti-malaria drug Chloroquine may be effective. Details are dodgy, but with the backing of both President Trump and Elon Musk there is much buzz.  The FDA is beginning a clinical trial.
  • SARS and MERS both mutated and eventually petered out. “The best case is the virus mutates and actually dies out” says Larry Brilliant, who as a young doctor helped wipe out smallpox.  “Only in movies do viruses seem to get worse”.
  • The cruise ship Diamond Princess served as an on-the-sea laboratory for computing the COVID-19 morbidity rate. After adjusting the ship’s results for its mature average passenger age of 58 years, a fatality rate of 0.5% is indicated.  While frightening, this is only 1/8 the popular media estimate.  This is because their number is based only on total deaths divided by total positive tests.  This is obviously skewed upward – a large number with the virus do not even realize they have more than a cold.  Also, many who are COVID-19 positive never take the test.
  • Assuming social distancing in the U.S. follows the blueprint from Singapore, it is not far-fetched to anticipate an infection rate of 10%. The resulting deaths at a 0.5% mortality rate results in twice the deaths from last year’s flu season.  While this would be a human tragedy, it is not close to the dire worst case scenarios we have been presented by many experts.
  • So far, the stock market’s response has mirrored the experience in 1917 at the onset of the Spanish Flu pandemic. In both cases the market quickly shed roughly a third of its value.  However, by the start of 1918 the market had already bottomed and begun to recover – even though the deadliest month was October 1918.  The lesson to be learned is that markets look ahead, and history suggests a recovery will begin well in advance of an actual economic upturn.