High quality stocks are down over 70%, and the broad markets are down by a third with some of the gloomiest oversold sentiment levels in history. With a sharp but short term Recession currently being priced into stocks its tempting to throw all your reserves into stocks while the tide is out. However, we are in the early to middle innings of the deleterious progression of the COVID contagion and fatalities whose impact has been compounded by the medically mandated shutdown of the economy. Metrics on our nations vitality are typically a month or more behind reality, thus the lightening strike to our country has barely begun to spill out into the financial reporting. January and February GDP data was relatively strong, on target for 2% growth, with the mechanical forecasting model of the Federal Reserve Bank of Atlanta ticking “up” to a 3.1% Q1 growth as of mid-March. There is no doubt that evidence of an underlying economic collapse will begin flooding non-stop across the newswires over the next 2 months. So even though equity markets may appear extensively oversold, the parabolic nature of the Coronavirus acceleration along with a tsunami of bad economic data, will make it difficult for stocks to sustain a major low and begin a new Bull market leg higher just yet. At the top in February we forecasted a bottoming process to this down-move to begin in April and that continues to be our outlook. Investors should allow negative data, such as the Empire State Manufacturing survey below, to accumulate for a few weeks before being too bold investing all of their sideline cash that we had recommended holding.
Real time evidence of a devastating drop in economic activity around the US can be viewed from traffic volumes in large cities around the country. In New York there is approximately an 80% decline in traffic volumes compared to normal. New York is a vital barometer of the nations financial health and this sample of contraction is almost identical in major cities throughout the nation. This depressing new normal should continue at least through the end of April and possibly far longer. During the panic phase of the 2008 Great Recession the US experienced a 5% GDP contraction. The current decent is far worse since back then traffic volumes were still busy, business travel and leisure were only marginally subdued compared to now. If the current pace of activity continues into June, then we will see a major GDP contraction of 6 to 10% in the 2nd quarter. If the mandated restraints on our economy to combat the virus continue for several quarters, then we would enter a Depression and warrant many Trillions in Government handouts from the Treasury printing presses.
While the March through June period has virtually locked in a severe Recession type contraction, we don’t currently expect a year long shackled economy or a Depression as the exponential COVID contagion curve begins to flatten in May in our view. Monetary and Fiscal flooding of stimulus will have limited effect on our economy as long as we have a COVID mandated lock-down of the economy with most hiding in their residential caves. However, we are quite encouraged by the medical efforts to treat and prevent this virus from maximizing its deadly potential. Regeneron Pharmaceuticals has outlined the 3 biologic attack plans to deal with the Coronavirus. The least helpful for now is producing a vaccine, as it would be one to two years away. The most immediate potential to increase COVID survivability is with an arthritis drug called Kevzara that has been very successful using antibodies to block respiratory inflammation – a major cause of COVID fatalities. Trials have begun on severe patients this week and if successful it will expand across the nation for the most critical patients near late April. If results are the same as in China for this arthritis drug, then the markets and the economy can begin to breath a huge sigh of relief having found a major weapon to weaken virus lethality. Regeneron also has a vaccine mimic that skips the 12 t0 24 month vaccine approval process and by July is expected to provide immunity to COVID-19. There are no guarantees here, but these breakthroughs could very well provide a one – two punch, knocking out a further threat from this pandemic and in weeks optimism of returning to normal life could return. When the all clear signal comes from our medical leaders it will inject far more stimulus into the US economy than the helicopter money that is about to drop Trillions into our pockets. Handouts can’t be spent while cowering in homes watching Netflix unable to work. The stock market is deeply discounted with too big to fail behemoths like Boeing off 80%, but April is where we expect to finally begin converting cash to stock investments.