Last week we mentioned the dreaded “D” word (see Science, Not Speculation). We promise to keep it more upbeat this week, focusing on the spectacular stock market rally of the past month. Despite stocks trading sideways for two weeks, the S&P 500 is up about 27% from the March 23rd low! Stocks fell nearly 34% from the February 19th peak to March 23rd, so we are only 7% (34-27%) from recovering the losses, right? Not exactly. Stock return math can be a little unintuitive at times.
To recover from the 33.9% decline, we do not need a 33.9% gain; we need a 51.3% gain! Why? Stocks fell 33.9% from the S&P top of 3,386 to a low of 2,237. A gain of 51.3% from 2,237 is required to get back to 3,386. The peak we fell from is a much larger number than the trough from which we are recovering.
So, we have already seen a 27% recovery; therefore, we need stocks to grow another 24% from here to get back to the peak? No. We just need to grow by 19%! How long will it take to recover the remaining 19%? Some might take comfort if we wax lyrical about the shape of the future recovery, but the truth is, nobody knows. As we discussed in our webinar, we can look to history as a guide, but each bear market is different. Our peace of mind comes not from speculation, but from knowing we have a disciplined investment process built to get us through whatever the future holds.
Headlines This Week
- Crude oil lost its “Black Gold” label after May oil futures contracts traded at a negative rate this Monday.
- Futures market traders have signaled that nobody wants to have oil delivered in May, and contract owners are willing to pay to skip the delivery as oil storage approaches capacity.
- While low oil prices are terrible for energy companies, they eventually lead to lower gas prices, which is positive for a consumer-based economy like our own.
Home Sweet Home
- Federal Housing Finance Agency (FHFA), along with Ginnie Mae, decided to facilitate payments to mortgage bondholders to alleviate liquidity concerns.
- Both organizations are planning to give borrowers in need of assistance up to 4 months of relief.
Not So Green on the Other Side
- The Italian short-term government bonds have crossed to positive yields since March, as investors continue to worry over the country’s debt
- There was no help from Eurozone this week either after the region refused to share coronavirus-related debt burdens.
- Argentina entered a 30-day delinquency period, giving the country some additional time to strike a deal with its bondholders before defaulting on their debt.
- The country is asking bondholders to wave payments amid the global coronavirus pandemic.
The Week Ahead
There are several significant reports slated to be released next week. While they could point to improving conditions, that may not mean much to the millions of Americans continuing to feel the impact of the virus.
- The U.S. Consumer Confidence figures will be released on Tuesday.
- U.S. GDP figures for Q1 will be announced on Wednesday.
- Many experts will keep their eyes on the latest Initial Jobless Claims numbers, set to be released on Thursday.
- The ISM Manufacturing PMI figures on Friday could provide more insight into just how much manufacturers across the country have been impacted.
Given how involved central banks have needed to be during the COVID-19 pandemic, next weeks’ regularly scheduled meetings may not bring any surprises.
- The U.S. Federal Reserve releases its interest rate decision on Wednesday.
- Considering all previous actions taken to date, experts feel the Fed does not have many new options left in the tank.
- The Bank of Japan is scheduled to announce its decision on Tuesday.
- While interest rates may not go lower, they are expected to increase their asset purchases.
- The European Central Bank is the last of next week’s three, on Thursday.
A large number of U.S. states will see their Stay-At-Home orders expire on Thursday, April 30th.
- Most states appear to be taking a cautious, phased-in approach to allow businesses to open back up to the public.
- A growing concern is how widespread a second-wave of COVID-19 cases could be, should society reintegrate too quickly.
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