Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
The FOMO Market
Some of you are reading the title of this week’s Hard Asset Insights and wondering, “What in the world is “FOMO?” FOMO stands for the fear of missing out, and is often used to describe the anxiety one feels when looking at social media and not participating in some activity with friends or a social media “influencer” of some sort. To be clear, there isn’t a lot of this social media-induced anxiety happening at the moment. Most of us are having to “shelter in place” or “social distance” from our friends or even loved ones while forgoing many of the things that might create FOMO.
For the purposes of this piece, though, FOMO relates to the incredible bounce that we have seen off of the market lows. This week alone, the S&P 500 was up 12.7 percent, and has made a 28.6 percent move off of the lows we saw on March 23, 2020 despite very negative headlines. Today, initial jobless claims came in at a staggering 6.6 million, which brings us to a total of 16.8 million Americans who have lost their jobs in the last three weeks. As of February of 2020, the Bureau of Labor Statistics defined the US workforce as 164.6 million people – so basically 1 in every 10 Americans has lost their job in the last three weeks. Further, a US Chamber of Commerce poll indicates that almost one in every four small businesses is less than 30 days away from permanently going out of business. There are approximately 30 million small businesses, as defined by the US Small Business Administration, in the United States.[1] If the polling is correct, we will lose 7.5 million small businesses in the United States in the next 30 days. Small business accounts for the majority of job creation domestically, and is the lifeblood of this economy. Its unravelling will unquestionably have a lasting impact on the economy, as well as on life as we know it. Some are calling for additional stimulus here in the form of a “Super Chapter 11” so we do not reach a point at which bankruptcies become “systemic.”[2]
Even many of the largest, most well-capitalized global public companies are struggling. We see announcement after announcement of furloughs, layoffs and wage reduction across virtually all sectors of the economy. Many companies, including many of those in the MAPS strategies, have either reduced or withdrawn guidance, citing poor visibility. Healthy companies have focused on liquidity preservation and, in some cases, lowered or withdrawn dividends. Others have done so as a matter of survival. Between March 16th and April 5th, 245 companies have withdrawn annual guidance.[3] There is simply no visibility. If companies are valued on the basis of earnings, cash flow, or net asset values, it is a struggle to wrap one’s head around valuation in the context of the current market environment. We have no idea what intrinsic value actually looks like. What is your definition of inexpensive if you have no basis by which to make a valuation decision?
Through this lens, it is very difficult to understand the fundamental underpinnings to the rally we have seen. We believe this can be attributed to several factors. The first, of course, is tremendous and unprecedented stimulus from the US Federal Reserve and expansion of the Fed balance sheet, as well as from Central Banks globally. In addition, the 2.2 trillion dollars we have seen in domestic fiscal stimulus is also unprecedented, and, as of April 9th, governments globally have announced a staggering $8 trillion in stimulus. The most recent data we have on global GDP is from Bloomberg. It indicates that, at the end of 2018, it was at 85.9 trillion USD. A full 10 percent of global GDP in stimulus has been announced, and we suggest that there is likely more to come.
A second significant contributing factor is short covering. While we have no up-to-the-minute empirical data on this, we observe that the rally off of the March 26th lows has largely been led by sectors that are struggling with deteriorating fundamentals. This is particularly evident in the energy patch. To wit, the XOP SDPR Oil and Gas Exploration and Production Index is up a staggering 22.5 percent month-over-month. The only fundamental underpinning for that kind of advance is optimism regarding an OPEC+ deal that will only slow the march toward full crude and products inventories. Even if a deal is reached, we see a very painful few months ahead for the commodity and its producers. To be clear, even though an OPEC+ deal has seemingly been reached as of the writing of this piece (though the situation is very fluid, as Mexico has already said they will not go along with the cuts and has asked to withdraw), the impact of full storage on pricing and the viability of the independent producers will become evident in short order. Granted, it will be delayed by the agreement, but ultimately the demand destruction from the economic shutdown is the real story. It is a heavily shorted sector because of these poor underlying fundamentals, hence the sharp rally. We have no FOMO around this particular area. The sector is still down 56.2 percent year-to-date.
As we are fond of saying, momentum begets momentum. It’s amazing how quickly we can collectively begin to ignore risk and uncertainty, and turn to greed and FOMO. The only apparent fear is that of missing out. Technically speaking, many traders – who by definition are short-term oriented and use technical analysis, or charts, as their primary source of analysis – are waiting for a “retest” of the lows. The more they do so, the less likely it is to happen. The bottom, of course, is only apparent with the benefit of hindsight. No one is going to ring a bell or say “time to get back in the pool.” The truth is, we have no clear picture of what the future is going to bring us. However, we do know that the risks are unprecedented, and, after a significant move off of the lows, we see the overall risk/reward proposition as less favorable. That said, “Don’t fight the Fed” rings true, and we are cognizant that policymakers will attempt pull out all of the stops to support asset prices and the global economy.
Best Regards,
David McAlvany
Chief Executive Officer
MWM LLC
[1] https://www.sba.gov/sites/default/files/advocacy/2018-Small-Business-Profiles-US.pdf
[2] https://www.bloomberg.com/news/articles/2020-04-09/could-super-chapter-11-help-an-economy-avoid-systemic-collapse
[3] https://www.irmagazine.com/covid-19-reporting/how-covid-19-affecting-earnings-guidance-and-dividend-payments
