What do we know?

We hope this finds you, your family and friends healthy. COVID-19 and the Saudi-Russia oil price war are two of major factors impacting everyone’s lives around the globe. Like reporting a fire to an eyewitness, the markets have fallen sharply due to these events. With the “shelter in place” directives throughout most of the nation it has given all of us more time in our homes, extra strain on our internet connection and time to think in detail about what has recently occurred and where we are likely headed.

Early in our careers we learned that there are things we know that we know, there are things we know that we don’t know, and there are things we don’t know that we don’t know.

“I can see for miles and miles and miles and miles and miles. Oh yeah!”
The Who

What do we know that we know?

We know that both the Dow Jones Industrial Average (DJIA) and S&P 500 Index declined into bear market territory during the first quarter of 2020. It is considered a bear market when a market declines by 20%. But not all bear markets are the same. There are 3 types of bear markets.

1. Cyclical Bear Market - This a function of a normal economic cycle which can be caused by rising interest rates and deteriorating corporate profits. Cyclical bear markets often don’t decline as much as the other types of bear markets.
2. Structural Bear Market - These are generally caused by an imbalance or a bubble. The most recent example was in 2008 due to over leveraging. Structural bear market recoveries can be long, frustrating and drawn out.
3. Exogenous Bear Market - This is the hardest type to predict as they are driven by an event such as war, major global political conflicts or our current situation, a pandemic. Historically, exogenous bear markets are relatively short-term, violent and recover quicker than the other types of bear markets.

Adding fuel to the fire (pun intended), on March 8th, Saudi Arabia started an oil price war with Russia. This situation was ignited (pun intended again) when the Organization of Petroleum Exporting Countries (OPEC) and Russia could not agree on a reduction in oil production. The price of oil had already fell about 30% this year due to reduced global demand that was largely tied to COVID-19. Saudi Arabia’s actions sharply cut the price oil to $35/barrel. This was the largest single day decline since 1991.

On April 9th, an agreement was reached by OPEC+, which includes OPEC and their friendly oil exporting countries, to cut oil production by 10 million barrels per day (bpd) during May and June. Oil production in July would be reduced by 8 million bpd from current levels and then curtailed to 6 million bpd starting on January 1, 2021. Mexico objected and the deal was put on hold. April 13th, OPEC+ adjusted the total immediate production cuts to 9.7 million bpd to satisfy Mexico’s demands.

Even before it was announced that Mexico had dissented, oil prices fell on this news. The market was concerned that this reduction, although historic in size, is not enough to offset the lack of demand due to the effects of COVID-19. Following this adjusted but still record cut of oil production, Brent crude closed at under $32/barrel.

The good news is gasoline prices are very low. The bad news there is not much demand as travel has greatly declined. Also, US oil companies are experiencing lower revenues which may lead to additional US job losses.

Fortunately the US government has been active on multiple financial fronts. The Federal Reserve has lowered interest rates to zero, created a backstop for the bond markets and announced $2.3 trillion of financing targeting small businesses and cash strapped municipal governments. Congress passed the CARES Act which authorized an additional $2.3 trillion to assist businesses and the unemployed.

We know that coronaviruses are transient in nature. We know that both Saudi Arabia and Russia need the price of oil to be above $40/barrel to balance their budgets. Both of these issues will pass and we believe the US government will continue to provide additional support to buoy the economy and combat high levels of unemployment.

“Sign, sign, everywhere a sign.
Blockin’ out the scenery, breakin’ my mind.
Do this, don’t do that, can’t you read the sign?”
Five Man Electrical Bank

What do we know that we don’t know?

We don’t know how long COVID-19 will impact the United States, nor the rest of the world. But again, coronaviruses are transient in nature. On March 13th, Apple reopened all 42 Apple Stores in China, approximately three months after COVID-19 was announced by Chinese authorities. As the US infection curve flattens, the stock market is likely to recover on the positive news and we will see our business begin to reopen as well.

We don’t know when OPEC+ will come to an agreement on the amount of oil pumped daily. Every day oil prices stay at these artificially low levels, all oil producing countries are unnecessarily burning (yes, pun intended again) revenue and profits. When an appropriate accord is reached, the news will likely propel the stock market upwards.

We know that we just experienced the worst quarterly decline for the DJIA since 1987 and the worst quarterly decline for the S&P 500 since 2008. In fact all 11 sectors of the S&P 500 Index were negative.

Below is a chart that shows the eleven quarterly occurrences where the S&P 500 Index has fell by 10% or more since 1990. On average, the S&P 500 Index has rebounded 6.78% the following quarter. While we don’t know how much the US stock market will return during the 2nd quarter of 2020, we believe that the market has attractive valuations that may be realized soon.

*Data from CNBC

“I heard two men talking on the radio in a cross fire kind of new reality show.
Uncovering the ways to plan the next big attack.
They were counting down the ways to stab the brother in the, be right back...”
Jason Mraz

What do we don’t know that we don’t know?

Will COVID-19 morph into COVID-20? Will there be an unexpected armed conflict? Will unemployment reach much higher levels than expected? What unexpected event is on the horizon? We don’t know.

What we have learned over our many years of combined experience is to expect this time and next time to be different. As Mark Twain stated, “History doesn’t repeat itself, but it often rhymes”.

“Do you think I’d crumble? Do you think I’d lay down and die?
Oh no, not I, I will survive!”
Gloria Gaynor

We believe that we are going to experience a “W“ shaped recovery. We experienced a sharp and violent decline which is normal in an exogenous bear market. As of this writing, the US stock market is enjoying a strong rebound, which may be a bear market bounce. Over the short-term, we feel the market will continue to be volatile in both directions until the COVID-19 curve flattens and OPEC+ cuts make an impact. Once there is greater clarity on these issues, we believe the US stock market is poised to rise rapidly.

A few opportunistic ideas:

1. Consider refinancing debt in this historically low interest rate environment.
2. Take advantage of this historic volatility. We can help you identify investments and strategies tailored for your specific goals, time horizon and risk tolerance.
3. Fill up your car with gas!

We strive to remove emotion as emotion can lead to making poor decisions. Sometimes it is good to be patient. Sometimes it is better to be opportunistic!

Onward & Upward!

Any opinion are those of Bryan Bertucci and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance may not be indicative of future results. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal.