Art Hogan’s Market Commentary – March 25, 2020

Morning Commentary

It was a turnaround Tuesday for the record books yesterday as the Dow Jones Industrial Average soared more than 2,100 points. The 11.4% move was the largest one-day gain since 1933, when the United States was still in the depths of the Great Depression, with some 30% of the workforce unemployed as investors contemplate the ultimate passage of a stimulus bill, juxtaposed against stocks at steep discounts. The biggest surges in the stock market usually follow some of the biggest sell-offs, and Tuesday was no different.

All eleven sectors in the S&P 500 rallied yesterday, with Energy +16.31%, Industrials +12.75%, and Financials +12.74% leading the charge. A lot of the underdogs had their day yesterday as the most beaten-down stocks in the past month were the biggest gainers. There was no sell-off in the last 30 minutes of the trading session like we saw last week, either.

The rally was sparked by news that U.S. lawmakers were close to an agreement for a $2 trillion fiscal stimulus bill intended to bridge the massive economic damage while the nation is all but shut down because of Covid-19. On Tuesday afternoon, Senate Minority Leader Chuck Schumer said, “I don’t see any issues that can’t be overcome in the next few hours.”

This morning we are hearing that The Trump administration struck a deal with Senate Democrats and Republicans on an historic rescue package that tees up more than $2 trillion in spending and tax breaks to bolster the hobbled U.S. economy and fund a nationwide effort to stem the coronavirus.

The legislation was still being drafted but McConnell said the Senate would vote on it Wednesday. It would still have to pass in the House before it gets to President Donald Trump’s desk. House Speaker Nancy Pelosi had consulted with Schumer throughout his negotiations with Treasury Secretary Steven Mnuchin.

The plan includes about $500 billion that can be used to back loans and assistance to companies, including $50 billion for loans to U.S. airlines, as well as state and local governments. It also has more than $350 billion to aid small businesses. Then there is $150 billion for hospitals and other health-care providers for equipment and supplies.

One of the most notable parts of the bill could be revised treatment for retirement accounts. Draft versions of the rescue bill have eliminated the 10% penalty for early 401(k) withdrawals, and added a waiver for required minimum withdrawals, or RMDs. The 401(k) change is surely to be controversial. On the one hand, retirement funds are a good way for many Americans to supplement missing income in the months to come. The virus shutdown will not last forever. As 18 months remains the worst-case scenario as we wait for a vaccine, so loaning yourself money seems like a small price to pay. That said, financial advisors have long warned against raiding 401(k)s before retirement. Any type of 401(k) loan would also encourage Americans to withdraw funds with stocks still down 30% over the last month. It’s not an ideal time to sell. We would actually argue that it is an ideal time to increase your 401(k) payroll deduction right now to front load the year at much lower prices.

We are certainly not out of the woods, but the political pressure to get people back to work is intensifying, as is the backlash. President Trump said he wanted people to get back to their offices by Easter, but his own health and military officials backed away from that idea. Still, there is a growing drumbeat in parts of the political and financial world that don’t want “the cure to be worse than the problem.” In other words, they’d rather restart the economy sooner (with new social distancing guidelines) and risk the further spread of the pandemic than see a prolonged recession or depression. We believe that math on that is inhumane and illogical.

On the policy front the Federal Reserve is expanding its asset-purchasing program to include municipal debt. Cities are going to need to spend huge amounts to fight the disease outbreak itself and still more to help their citizens and businesses stay afloat. The Fed is sending them a clear message: You’ve got our support to borrow and spend. Global monetary and fiscal policy will help cushion the blow to the global economy in the medium term, but as yet, they have offered little solace to nervous investors in the short term. Appropriate health care policy, including ensuring that there are enough test kits available, that sick patients without health care coverage can receive treatment, and that those deciding whether to miss work can afford it would go a long way. So would measures to increase surge capacity in terms of ventilators, hospital beds, and protective equipment for medical personnel.

Unless and until we see the number of new case reports hit a peak, like they have in both China and South Korea, we are likely to stay in the roller-coaster like volatile market environment. We will get there and markets will recover. You can track the Coronavirus on the Johns Hopkins Website Here

All bear markets come to an end, eventually. It feels extreme now because it is. There is no easy way to quantify either the economic shutdown and what the eventual recovery is going to look like as the monetary and fiscal policy initiatives are as historic as the economic decline. The S&P 500 has already dropped nearly 34% in under a month suggesting the panic phase of selling could be nearly done based on the 14-week RSI. Such extreme oversold readings have tended to happen as the heaviest of the selling was largely behind us. In the meantime, remember to take care of yourself and your families. We all need each other right now. Stay safe and follow CDC Guidelines for preventing Covid-19 spread CDC Guidlines Don’t panic, Rebalance; talk to your Financial Advisor; Stick to your Strategy; and if this type of market volatility has you up at night, Recalibrate your Equity Exposure to match your Risk Tolerance

Other News:

It’s not too late to Refi – U.S. loan applications for buying and refinancing homes plunged last week by the most since the global financial crisis, amid coronavirus shutdowns and related financial turmoil that pushed borrowing costs higher. The Mortgage Bankers Association’s index of applications fell 29.4% in the week ended March 20, the biggest decline since early 2009. Home-purchase applications dropped by 14.6% while refinancing applications plummeted 33.8%. The average contract rate on a 30-year fixed mortgage increased 8 basis points to a two-month high of 3.82%.

Apollo 250 – In an upbeat call with investors, Apollo Global Management Inc.’s co-heads of private equity investing said they are tracking more than 250 potential opportunities to scoop up distressed assets, and pursuing chances to enhance returns by snapping up its own portfolio companies’ discounted debt. In a private briefing of limited partners Tuesday, Matt Nord and David Sambur said the firm has spent more than $1 billion pouncing on opportunities linked to 10 distressed companies, and that they’re drawing on additional funds from investors to pursue more, according to a person with knowledge of the call. The market turmoil caused by the Covid-19 pandemic has presented a “time to shine,” the duo said repeatedly, even if it’s inflicting pain on some of Apollo’s holdings.

3M is Stepping up – Andrew Rehder, manager of 3M Co.’s respirator mask factory in Aberdeen, S.D., got the call from headquarters on Tuesday, Jan. 21. He gathered about 20 managers and supervisors into a conference room, where they sat, unworried, less than 6 feet apart. Rehder told them that a new virus was spreading rapidly in China and that 3M was expecting demand for protective gear to jump.

The Aberdeen plant had already ramped up production of respirator masks in response to demand from first responders battling wildfires in Australia and contending with a volcano in the Philippines. Now, Rehder told his charges, Aberdeen would shift to “surge capacity.” Idle machinery installed for precisely this purpose would be activated, and many of the plant’s 650 employees would immediately start working overtime.

This is 3M’s moment, one for which the staid, 118-year-old Minnesota manufacturing giant—the maker of Post-its, Scotch tape, touchscreen displays, and scores of other products—has been preparing for almost two decades. Coming out of the SARS epidemic of 2002-03, the company realized it wasn’t fully equipped to handle unexpected explosions of demand in the event of a crisis, or what it calls an “X factor.” It decided to build surge capacity into its respirator factories around the world.

Over the years, with X factors such as the Ebola panic and the H1N1 flu virus generating flash floods of demand, the company kept refining its emergency response. When the world started clamoring for respirator masks to help confront coronavirus, 3M was ready.

People everywhere are scrambling for ventilators, Covid-19 test kits, bleach, and toilet paper. But almost no item is as scarce—and as vital to addressing this medical emergency—as the N95 respirator masks made by 3M, Honeywell, Medicom, and a smattering of other companies. Without respirators, doctors, nurses, and other medical personnel are at increased risk of contracting the affliction they’re treating.

The Week Ahead:

Wednesday- 8:30 a.m. Durable goods; 9 a.m. Housing price index

Thursday- 8:30 a.m. Jobless claims; 8:30 a.m. Q4 GDP [final]; 8:30 a.m. Advanced economic indicators

Friday – 8:30 a.m. Personal income/spending; 8:30 a.m. PCE price index; 10 a.m. Consumer sentiment

Upcoming Catalysts:

Int’l Research Forum on Monetary Policy at the ECB – Mar 26-27.

North Dakota convention/caucus – Fri Mar 27.

US jobs report for Mar – Fri Apr 3.

Alaska, Hawaii, Louisiana, Wyoming primaries/caucuses – Sat Apr 4.

US bank stress tests due to the Fed by Apr 6.

Wisconsin primary – Tues Apr 7.

FOMC meeting minutes (from the 3/18 meeting) – Wed Apr 8.

GILD coronavirus drug (Remdesivir) trial results will be made public Apr 27 in China

Connecticut, Delaware, Maryland, New York, Pennsylvania, Rhode Island primaries – Tues Apr 28.

OPEC meeting – June 9-10.

G7 Leader’s Summit – June 10-12. Camp David.

Fed will publish bank stress test results by June 30.

Fed will communicate its new monetary policy framework – first half of 2020.

Democratic Convention – starts Jul 13 in Wisconsin.

Summer Olympics in Tokyo – scheduled to begin Jul 24.

Republican Convention – starts Aug 24 in Charlotte.

Jackson Hole Conf. – likely to begin Thurs 8/27.

First US Presidential debate – Sept 29, 2020.

First (and only) VP debate – Oct 7, 2020.

Second US presidential debate – Oct 15, 2020.

Third US presidential debate – Oct 22, 2020.

US election – Tues Nov 3, 2020.

The views and opinions expressed herein are those of the analyst Arthur Hogan and are current as of this report’s posting date. This commentary is general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. Neither Art Hogan nor National Securities Corporation is affiliated with the issuers mentioned herein, and no part of this analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the analyst in the report. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice. Please note that any investment involves risk including loss of principal.
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