CWS Market Review – March 20, 2020

This continues to be one of the most dramatic periods in Wall Street history. The coronavirus and subsequent “social isolation” policy have had major impacts on the U.S. economy.

This week’s CWS Market Review will be a bit different. Since we’re in such an unusual period, I’ll lay out for you my thoughts as to what’s happening, when it will end and what’s the best way to position ourselves for the future.

Let’s be clear, the U.S. economy is in a recession. We don’t have solid numbers yet, but I expect to see gigantic increases in unemployment and gigantic drops in GDP. In Washington, the government is working on a major stimulus program, but the details still need to be worked out. This may alleviate some of the damage, but it won’t stop recession.

Stocks have rallied and crashed nearly every day. The S&P 500 moved by more than 4% over eight straight days. On Monday, the Dow plunged nearly 12.9%. That was its second-largest daily percentage drop in its 124-year history. And this comes on the heels of last Thursday when the Dow had its fifth-largest drop in history.

In fact, Monday’s fall edged out Black Tuesday, the infamous crash from October 28, 1929. You may be familiar with the famous Variety headline, “Wall St. Lays an Egg.” That was in reference to Black Tuesday. Well, this week, we laid an even bigger egg.

The numbers are staggering. The S&P 500 moved by over 9% over three straight days. Over 18 trading days, the S&P 500 lost 29.5%. In one six-day stretch, the S&P 500 fell 20.7%. Here’s a great stat via Callie Cox. Since 1990, there have been 56 trading days when the S&P 500 has posted an intraday range of more than 5%. We’ve had seven of those this year, and five in the last five trading days.

The Federal Reserve has now announced multiple programs in an effort to keep the financial system from cracking. Near where I live, and I’m sure it’s similar in your region, too, all the bars and restaurants are closed. Some are doing takeout. This is a devastating time for workers in the hospitality industries. (If you can, buy yourself a gift card from a local restaurant. That will keep the revenue stream going and you can cash it whenever you want.)

This Drop Is Different. Here’s Why.

Some of the recent market action has been so severe that it’s nearly impossible to keep up with which stocks have been punished and why. On Tuesday, the utility sector rose by nearly 13%. That just leaves me stunned. The whole idea of owning utes is to avoid such gyrations. Some stocks are jumping or falling 20% each day. Ansys (ANSS), which is a fairly staid company, saw its stock change by more than 12% on three straight days.

But here’s the key point I want to get across: the recent selloff in the market is quite different from previous ones. This time, the threat to the market is external. It’s not the excesses of a bubble that pulled down the market (though there are excesses). Most businesses were in fine shape before the social-isolation policy caused the economy to grind to a halt. There was little wrong with the fundamentals of the economy.

Here’s a thought exercise. Imagine the stock market is like betting on runners in a race. What drives who wins or loses is the skill of each runner, his or her training, exercise, nutrition and strategy. Those would be like the fundamentals we talk about like dividends and P/E Ratios.

But what’s happened is that in the middle of the race, a heavy weight is placed on the backs of each of the runners. The weight is so heavy that it brings all the runners to a halt. Note that there’s nothing wrong with the runners. Once the weight goes, they’ll be back to normal.

That’s similar to what we’re dealing with here. The structure of the U.S. economy is (mostly) sound. Things will change once there’s clear evidence that the virus is losing. There’s little substitute for victory.

I often urge investors is to avoid one-dimensional thinking. People always ask me if the president or the Fed is going to harm the market. I explain that the market is far more complicated than one variable can affect.

In this case, though, it really is all about one variable. As soon as there’s clear evidence that we’re winning the war against the coronavirus, the financial markets will respond. Until further notice, all vaccine and treatments news is economic and financial news.

The Doolittle Raid of 1942

There are no similar historic examples, but I want to mention what happened to the U.S. in 1941 and 1942. After Pearl Harbor, the U.S. stock market started to fall as investors gradually realized the enormity of the task before them. The entire country had to be mobilized for war from a standing start.

There wasn’t much good news, but that changed dramatically on April 18, 1942 with Jimmy Doolittle’s daring raid over Tokyo. This was the famous “Thirty Seconds Over Tokyo.” For history lovers, it was on the anniversary of Paul Revere’s ride.

Militarily, the Doolittle Raid didn’t do much, but psychologically, the effect was incalculable. It told Americans that we could do this job. That’s what we need to see in the fight against the coronavirus. The market and economy are going to be shaky until we see unmistakable signs of progress. There’s a big “virus discount” hanging over the market. I don’t know how large it is, perhaps 10% to 20%. Once that goes, valuations should respond.

Thursday’s market was interesting because it was the first time in several days that trading looked something like normal. The daily change was one-tenth of the least volatile day of the preceding eight sessions.

If the market hasn’t turned a corner, perhaps the panic phase has. Bear markets tend to be very concentrated. Even long bear markets find that most of the pain happens over the course of a few days. We may see stocks go down some more, but I’m doubtful we’ll see another string of days so frantic.

The Buy List Is Beating the Market

Given how extreme the stock market has been over the last three weeks, I’ve been impressed by the performance of many of our Buy List stocks. Over the last four days, the S&P 500 is down 11.13%, while our Buy List is “only” down 9.33%.

Hormel Foods (HRL) has not only rallied, but the shares hit a new 52-week high on Wednesday.

Shares of Stepan (SCL) have been on fire. The stock has gained more than 42% in four trading days. The stock hit another new high on Wednesday.

Church & Dwight (CHD) is another stock that’s managing itself well. For the year, the stock is down about 5%. That makes it the 33rd-best performing stock in the S&P 500.

Sherwin-Williams (SHW) reaffirmed its Q1 guidance and said it saw little disruption to its supply chains.

Ross Stores (ROST) said it’s withdrawing its previous guidance and cutting back on its capex plans.

Intercontinental Exchange (ICE) said it will close the floor of the NYSE and only have electronic trading. Two people tested positive this week.

At the opposite end, some of our stocks have been hit very hard. Shares of AFLAC (AFL) have been cut in half this year. Obviously, as coronavirus spreads, claims will increase. I still have great faith in AFLAC. If you recall, the company handled itself well during the tsunami in 2011.

Moody’s (MCO) is another stock that’s fallen sharply, though shares of MCO had done very well until the market broke. I think Moody’s is one of our top candidates to rally back strongly.

Earnings Preview for FactSet

FactSet (FDS) is due to release its fiscal Q2 earnings on March 26. This is for the quarter that ended on February 29, so the results won’t reflect the coronavirus. In December, FactSet reported fiscal Q1 earnings of $2.58 per share. That was a 9.8% increase over last year, and it easily beat Wall Street’s estimate of $2.42 per share. That was good to see because FDS had alarmed investors in September when it gave rather unimpressive guidance for 2019.

For fiscal Q1, organic revenue grew 4.2% to $367.9 million. Annual Subscription Value (ASV) plus professional services, which is a key metric for FDS, came in at $1.48 billion. I also like that FactSet’s operating margin improved to 33.9% compared with 31.5% last year.

Wall Street expects Q2 earnings of $2.49 per share. That sounds about right. The last we heard, FactSet expects earnings this year of $9.85 to $10.15 per share and revenue between $1.49 and $1.50 billion. Of course, that’s pre-virus. I would expect FactSet to withdraw any guidance.

That’s all for now. Some key economic reports will be coming out next week. The new-homes sales report is due out on Tuesday. On Wednesday, the durable-goods report comes out. On Friday, we’ll get another revision to the Q4 GDP report. The last estimate said that the economy grew in real terms by 2.1% for the final three months of 2019. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on March 20th, 2020 at 7:08 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.