Houston we have 3 problems…this is bad

Houston we have 3 problems…this is bad

The three key risks to the economy and markets, outlined in the chart above, still remain the same.

We are continuing to monitor the landscape but fundamentals haven’t significantly improved relative to a couple of weeks ago.  We still feel the risk of COVID19 is high and expect a longer period of human impact.  Fundamentally the Federal Government is pushing States to take leadership in this fight.  However not all governors are on the same page, and domestic travel continues the risk of spreading continues to grow.  Also, there is bound to be some fatigue with families being in their homes for prolong periods of time.  We are seeing it within our family (with a 2 and 4-year-old) and with our neighbors.  Kids can’t understand why we can’t go to the Zoo or parks.  Imagine when that frustration meets working parents coupled with economic uncertainty – a mixture that will lead some people to relax their quarantine measures and potentially prolong our relationship with the virus.

The good news is the Fed has been quick to respond and have used more firepower than I have ever seen in historical data.  Liquidity has come back significantly specifically for business owners.  However, without normal business activity, liquidity will dry up quickly and the risks to the economy will remain.  As liquidity dries up there is risk that businesses will default on debt which will increase credit risk.  The government has started to buy bonds via BlackRock and that created some short-term peace of mind.  

Potential new lows coming

I even created a recipe called “The perfect storm for emotion driven investment decisions”

  1. Start with a health pandemic that forces people to stay home.
  2. Add a lot of uncertainty
  3. Don’t allow families or friends to meet
  4. Have no sports or live TV
  5. Add 24/7 news 
  6. Instant access to one’s investment accounts

Again, we don’t know where the market is going.  No one does! Being rules based allows us to drastically reduce all decision making, which really means reducing emotion-based decisions. Here is research from various different sources to prove most indicators are sending mixed signals.  

Equity Trade Signals 

  • Ned Davis Research CMG U.S. Large Cap Long/Flat Index: Buy Signal – 100% U.S. Large Cap Equity Exposure
  • Volume Demand (buyers) vs. Volume Supply (sellers):Sell Signal – Bearish for Equities
  • S&P 500 Index 50-day vs. 200-day Moving Average Cross: Sell Signal – Bearish for US Large Cap Equities
  • NASDAQ Index 200-day Moving Average Trend: Buy Signal – Bullish for US Large Cap Technology Equities

Investor Sentiment Indicators

  • NDR Crowd Sentiment Poll: Extreme Pessimism (S/T Bullish for Equities) 
  • NDR Daily Trading Sentiment Composite: Extreme Pessimism (S/T Bullish for Equities) 

Fixed Income Trade Signals

  • CMG Managed High Yield Bond Program: Sell Signal – Bearish for High Yield Corporate Bonds
  • Zweig Bond Model: Buy Signal – Bullish for High Grade Corporate and Long-Term Treasury Bonds

Economic Indicators

  • Global Recession: High Global Recession Risk
  • U.S. Recession: High Probability of U.S. Recession Risk (Next Six Months)

Select Recession Watch Indicators

  • Global Recession Probability Indicator: High Global Recession Risk
  • The Economy Based on the Stock Market Indicator: High U.S. Recession Risk
  • Recession Probability Based on Employment Trends: Low U.S. Recession Risk
  • Credit Conditions – Recession Indicator: Low U.S. Recession Risk
  • U.S. Economy vs. Yield Curve: High U.S. Recession Risk


  • Trend Indicator – 13-week EMA vs. 34-week EMA: Buy Signal

(source: Stephen Blumenthal)

As you can see from above, these various indicators and trade signals have conflicting opinions on future economic trends and market performance.  We believe we will be retesting new market lows in the next few months driven by higher than anticipated unemployment levels in the near and longer term.

We feel the odds of reaching 2,300 for the S&P are high and for perspective the 2008 recession of 50% drop will put us near 2,000.  With a sharper drop in unemployment our guess is we will test new lows which are risks to the economy and markets.  However, we continue with our rules-based process and if we do hit our set thresholds than we will look to take on more risk.  This will increase both downside and upside market exposure.  It is important to keep in mind that the markets have sequential risk and therefore price in data are the odds and they are not 50/50.  

How big is your lobbyist?

The government needs to do a better job to help main street people vs large corporations.  I did a quick google search and found that 25% of the $2T is going to big business which doesn’t make sense to me.  Let me explain: The Airline industry spent $45 Billion dollars on share buybacks in the last couple of years.  Which mainly enriched executives, hedge funds and shareholders who were able to lock in their gain by reducing the number of shares. However, by leveraging the companies they took on extra risk of serving their new debt.  And I get that Airlines could not have predicted COVID19 but they should have had an emergency fund.  Just like all of us should have an emergency fund.  But since they don’t, and revenues are down 90% we the taxpayers are now bailing them out by giving them federal support of $58 Billion.  Which is $13 Billion more than what they did with buybacks.  If all the airlines went bankrupt and restructured, I feel confident the planes will still be there and travel will continue when we are ready to fly again. 

We have identified 6 key planning opportunities to help clients near or in retirement specifically around investments, taxes and estate planning to help you navigate the risks to the economy and markets. We are working to reach out to all our clients over the next two- three weeks and update financial plans and tax analysis and run an analysis to see which of these opportunities can benefit your specific situation.  

All people will be impacted and there are several good planning opportunities.  The cost of not looking at your situation with a professional can be thousands of dollars in savings or taxes.  If you are not working with someone that is helping you navigate these times or what a second opinion our experienced wealth managers are here to help. Feel free to contact us today!