Dear Clients & Friends:

There aren’t really any words to accurately describe the week we all just experienced. In the news, in our local schools and stores, in our own homes, and of course in financial markets. It has been unprecedented in every way.

There are lots of opinions floating around about what’s happening—why the market seems to be falling apart; how serious Covid-19 (Coronavirus) is; how long the state-specific but quasi-mandatory shutdowns will last; what the economic damage will be; how much of said damage will be offset by Government stimulus; ad infinitum. The one thing that everyone seems to agree on, however, is that things are bad. Immeasurably bad.

And we use the word ‘immeasurably’ in the literal sense - we cannot actually measure how bad things supposedly are. Or might become. Because we don’t know...

We are seeing estimates for Q1 and Q2 GDP to not only come in negative, but a -20% number for Q2 was thrown out by a major bank this week. That’s certainly not consensus, but a sub-zero reading seems all but a foregone conclusion at this point. The argument being—if people can’t leave their homes, how can they be spending? But what about the fear that shopping malls and businesses that require physical locations are doomed because of the rise of online shopping?

Reminder: More than 70% of US GDP comes from consumption.

Estimates for upcoming unemployment readings are equally ominous, with anyone in food, travel, or hospitality being the first and hardest hit. We’ve seen many employers, wherever possible, institute “work from home” (WFH) orders. There are significantly fewer cars on the road, that’s for sure. But how many full-time jobs have actually been lost, permanently? Are employers and employees taking advantage of Coronavirus-related leniency with the Unemployment Office to ensure there is no gap in their take-home pay? We just don’t know.

Prior to the Coronavirus outbreak, our nation’s unemployment was at a ~50-year low, with the economy chugging along at about a 2% annual GDP growth rate, down from the 2.2% rate of 2019. The stock market was up over 25% last year.

But as of now, this month is on pace to be the single worst since October of 2008, during the depths of the Global Financial Crisis (GFC). And this is the fastest drop from an all-time high into a bear market (more than 20%) on record. It’s been breathtaking and heartbreaking.

Making it worse is just how unknown all the unknowns are. Nobody can tell us with any degree of confidence how long this will last, or the extent of the economic damage when it’s all said and done. Could it be less than what the most negative projections suggest? A lot less? Is it possible that, after a successful nationwide quarantine period (perhaps assisted by warming weather), the economy more or less gets back to functioning as it should? Maybe not all at once but in a reasonable amount of time? We just don’t know.

We like to focus on the things we do know.

There is an old saying that “Nothing changes sentiment like price,” which means that with high prices comes excitement and enthusiasm. With low prices comes fear, anxiety, even panic.

Is it possible that the plunging stock market has exacerbated fears about the damage that may, or may not, be inflicted on the U.S. economy? It didn’t feel like economic damage related to the virus was on too many minds until the stock market began dropping.

We've referenced the CNN Fear & Greed Index many times, and weekly readings below 20 are rare. Below 10 are a contrarian buy signal, almost without fail. Below is today’s reading...

And that is up from a reading of 3 earlier this week, and came with a VIX spike above 80.

As a reminder, the VIX can be most easily explained as a “fear gauge” for the market—essentially, VIX measures how much people are willing to pay for protection from a further market fall. We haven’t seen a VIX this high since 2008. Here is a chart showing abnormally high VIX readings/spikes over the last five years.