Market Views 4/6/20

Why didn't the market fall on terrible jobless claims? When will stocks return back to pre-COVID prices?

Welcome to a ton of new subscribers. To be honest, I wasn’t planning on sending Market Views as a newsletter, but have gotten a lot of inbound over the past few days and some feedback that I should.

I normally write about emerging technologies, venture capital, and more in my newsletter On My Mind, which is why some % of you signed up, so hopefully this doesn’t bother you.

For a full rundown of my last few weeks of near-daily views on markets go to this twitter thread or my Notes website.

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Disclaimer: This is more for scalable sending notes and personal accountability. Not a professional public market investor, not investment advice, likely all bad advice from someone spending not nearly enough time researching public market dynamics. Also not really editing these pre-posting.

Market Views 4/6/20

Why didn’t jobless claims crash the market and when will stocks recover?

We now need clarifying news to move stock prices

Last week after a horrible jobs number everyone in the twittersphere was shocked that the markets didn’t tank and looking for answers. There are a few ways to look at this, with the easiest being to point them to a discounted cash flow model and explain that companies are based off a belief in future value of earnings. While the jobless claims number was a shocker to many (especially because the chart looked so stark), it really didn’t change the economic view of many of these companies. As I’ve been harping on across basically everything I’ve written over the past few weeks, we all are operating under the assumption that this is going to be really bad, that “main street” is outsized effected vs. wall street, and that we don’t have a good way to quantify that loss. Thus, after a massive sell-off in public markets a few years weeks ago due to fear and an impending global pandemic, the only thing that can materially change our view is clarifying news. So when we see 6.65M jobless claims the market shrugs and says “uh, seems bad but doesn’t really allow us to materially update our model” and then public markets trade sideways on the news.

Clarifying news can hold different definitions at various points in time. For some reason, markets believed that Trump speaking qualitatively was clarifying news a few weeks ago, however have begun to drastically mark down the value of that input, as he continues to fire from the hip daily in his pressers. A similar view has been held with respect to China numbers (of which many early models were based off of), which as we talked about last week, has now been slanted more towards a garbage in and garbage out data modeling view.

(h/t Bulger

With that said, perhaps we are starting to get better quantifying data as we’re seeing deaths and infections fall across Europe and have perhaps passed a peak in NYC (see chart below for ER data) here in the states. The NY Times has doubts on some of these numbers (as do many others) but it’s more likely the positive news gets amplified and markets trade up on it in the short-term.

I say short-term because we still don’t have strong data on resurgence rates, timelines for testing, or a ton of other things that could lead to the secondary sell off that I’ve been anticipating. As I’ve said, a lot of these also assume a stronger level of distancing than I think we’ll be able to sustain. Right now, in early spring, we’re seeing humans’ ability to stay inside (sorta) and isolate for a few weeks (with a ton of complaining). As weather continues to turn for the better across the country (and northern hemisphere) and we get pushed from April 30th to maybe memorial day, I don’t have a ton of faith we’ll see pseudo-elective social distancing maintain, and a government mandated lockdown would likely send things further south.

COVID-19 & Stock Recovery Timelines

Timeline of distancing is the big question on everyone’s mind as it will drive economics and likely the gap between a recession and a depression. These questions come at the economy from multiple angles but largely rely on how earnings can return after suffering a demand shock for 2+ months, as well as how the world is changed after this.

On the first order (and broad) question of “when can we go places again” these two charts below show both where some believe we are on the curve, as well as the likely restriction lifts. I’d say that the April 30th lift of restriction will likely not come to fruition in the US and instead be pushed a few weeks as Trump potentially sees positive signs in the market with improving, post-peak data.

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How the rest of the global economy will impact markets, is something I’m less of an expert in, especially with the complexity of supply chains that has only grown stronger over the past decade. But for reference, here’s a chart from JP Morgan on the various countries and their respective phases.

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So now that we have a timeline of some sort (let’s just say June 1), we have to begin to look at the earnings impact. Goldman is projecting that after a crisis, we usually see a bounce back of ~3 years before we get back to prior earnings per share levels.

So back to stock prices and earnings. If we see the above Goldman report of 3 years to get back to EPS levels, we can look at past data from bear markets to understand potentially how stock prices will follow. Looking at the last two bear markets, we see a slight lag between where earnings breakeven and markets do, however both of these were followed by very strong bull markets. As Ben Carlson notes, this slight lag could provide massive tailwinds for another large bull run.

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My opinion is that we could see a slightly closer coupling of these two principles as the shock isn’t one of financial systems or company health this time around but instead one of exogenous risk exerted on the market. Because of this as well as aggressive fiscal policy to push people towards risk-on assets in search of yield, it’s more likely that we’ll see markets want to pay for future growth at a faster rate than before. As Carlson says:

It’s true that the price of an asset should reflect the present value of all future cash flows but investors often over- or under-react based on their expectations of the future, meaning the pendulum can swing far above and below fundamental values.

Other Notes

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  • Related to a lot of these unemployment numbers, we should be continually watching those that leave the labor force. As any economics undergrad can tell you, discouraged workers and those not in labor force have a real draw on the economy, and thus are good tertiary indicators.

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  • A lot of people are staring at Alphabet and Facebook stock prices while trying to understand the impact of a large portion of ad demand fleeing the market in the short-term. This chart shows some data on that across various categories. Anecdotally, I’m seeing closer to 50% drop off for digital advertising prices, but probably even a larger flight from demand on some consumer areas I’m exposed to.

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  • Americans realizing that the light stuff won’t do and headed straight for premixed cocktails for that extra spice in their day is a trend I didn’t see (vs. just pure grain alcohol or moonshine). #quarantinis

What I’m Doing

I’ve sold off all of my VIX longs. Still short TSLA, ZM, URBN, MNST, and a few other + most indices. Likely selling part of my FTSE short today as I’m not sure I want to ride the ups of amplified good news with quieted bad news in the short-term (this is an interesting dynamic of where we are in the cycle that should be written more about).