Major Market Indicators (MMI) Report March 2020
Embracing the Corona Bear
The mighty 12-year bull run has come to an end from recessionary fears due to the global Corona virus epidemic. We face a market that is seemingly bottomless as there is increasing uncertainty to the economic damage the Corona virus will ultimately have on the world before a vaccine is created.
Exhibit 1: MMI Market Indicators Assessment
The good news is the fed has sprung into action, fighting with both fiscal and monetary stimulus. The fed’s $2 trillion booster shot with a velocity factor of 1.5 will add roughly $3 trillion to fill the gap from the Q2 drop. With attractive valuations for the long-term, combined with off the charts negativity in our sentiment readings, the aforementioned policy moves should get this roller coaster back on track to recovery.
Mind numbing volatility has blown out the VIX and VXN to 20-year record highs, exceeding 2008 levels. The bull-to-bear ratio has turned bullish at 0.60 bulls to 1 bear, as the Corona bear has ended the reign of the bulls. The put ratio has skyrocketed to 1.5 to 1. The Arms index also shows an extremely oversold market.
Technical Indicators: Bearish
With major equity indices cascading 20 to 35% in the last several weeks, there is virtually nothing positive to hang a hat on here. I will list the data only because it is so stunningly horrible. Last week, new highs were 53 and new lows were 1,908; weekly advance/decline on the NYSE was 521 to 1163; weekly advance/decline on the NASDAQ was 148 to 2544. In March, the S&P 500, the Dow Jones, the Russell 2000, and the Russell Micro-cap indices were 21.0%, 26.5%, 35.6%, and 37.6% below their 200-day moving averages, respectively.
Exhibit 2: IWC Russell Microcap ETF 1-Year Performance
Liquidity Indicators: Bearish
To note at press time, we are concerned about restrictions on share buybacks imposed by the federal government as a condition to receive bailout money. These restrictions would mainly impact the hospitality and transportation industries.
Exhibit 3: Delta Airlines (DAL) 1-Year Performance
Margin levels on the NYSE of 33% remain uncomfortably high relative to credit balances. During the March downfall, over $20 billion was taken out of domestic equity funds and ETFs. Meanwhile, over $3.7 trillion dollars sits in money market funds, representing over 14% of the total equity market cap. This money on the sidelines will provide ample fuel to launch the next bull market.
EPS Momentum: Bearish
In the interest of time, it is safe to say that EPS estimates will be receiving a negative readjustment due to the Corona virus epidemic. Although street analysts have yet to lower their 2020 estimates, we anticipate a 10% negative EPS adjustment down to $150 for the S&P 500.
Valuations are decisively positive on all three of our measures. Our absolute value indicator is now positive for the first time in over five years with the market trading at a mere 7% premium to replacement cost. Total market cap to GDP is now much more reasonable at 107%, which registers bullish. Finally, our relative value indicator shows an earnings yield at a 270 basis point premium to the BBB corporate bond yield.
Monetary Indicators: Bullish
We applaud the fed for its decisive move to flood the market with liquidity and slash interest rates. Our excess liquidity indicator is a positive 177 basis points above GDP. Fed interest rate cuts have repositioned the yield curve to a very positive slope with the one-year bill 100 basis points below the 10-year bond. As a further indicator of extreme fear, the values in our high yield fund indicator are now bullish at a 500 basis point premium to 10-year treasury bonds.
At present, we believe the Fed’s aggressive actions will reinvigorate the economy to post positive growth in Q3 and Q4, thus saving the presidency for Trump.
A Note on the Corona virus:
The end to the Corona virus is the great unknown factor here; however, we believe that, in the shuffling madness, investors are overlooking some important comparables and recent favorable trends. In fact, over the last 100 years, we have had three other pandemic markets. In the Spanish flu of 1918, the Dow Jones was off over 22% and deaths were estimated at 25 to 50 million worldwide. In 1968, the Hong Kong flu slammed the market with an estimated 1 to 4 million deaths while the S&P was up 10.8% for the year. In 2009, we were hit with the swine flu (H1N1) which resulted in an estimated 150 to 570,000 deaths and the S&P 500 was up 26% for the year. The 2009 comparable may not be as strong as the other comparisons as that was the year following Great Recession. No one knows what will happen but based on current daily growth rates of 11% per day, we estimate over 450,000 in mortality due to the Corona virus.
A Further Note on the Presidential Election this Year
In modern times, only one incumbent or incumbent's party has been reelected in a recession year. We believe if Biden were to win presidency, the market multiple would diminish by over 10% due to uncertainties relating to forward tax policies and regulations.
Keep washing those hands and happy investing. We see the S&P fair value of 3,375, +40% at press time.
Robert Maltbie, CFA
President, Singular Research
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