Market Triage

By David Nelson, CFA CMT

In just 23 trading days from February 19th to March 23rd U.S. equity markets declined on average (-39%). To put that perspective the bubble took over 600 trading days from March 2000 – October 2002. Even the Financial Crisis of 2008 ending 2009 took over 350 trading days. To move from a raging Bull to Bear market in just 23 days makes it the perfect Black Swan event.

Bear Markets
Peak to trough

By definition, a Black Swan event is unknowable. The breakout of COVID-19 first in Wuhan China and now over 177 countries has challenged every sovereign government to come up with a response.

China the epicenter of the crisis and the origination point appears to have plateaued but of course China’s opaque society and ability to manipulate the numbers is always suspect. Even Tuesday China released a PMI number of 52 for the most recent period showing expansion. Consensus was around 44 and likely a lot closer to the truth.

With most of the nation shutdown leaving only essential or work from home businesses in operation investors are about to see economic data never recorded in history. Already last week we had our first 3 Million plus unemployment claims report with some economists believing the total figure could reach over 30 million. Goldman’s Jan Hatzius is expecting worldwide GDP to contract -34% in the second quarter.

The above begs the questions why did stocks rebound last week and is it signal the worst over or is it a sucker’s rally setting us up for even more pain ahead?

Like most things in life the truth rarely lives on the extremes and is a little more nuanced. As I pointed out in my beginning of week post last week’s Monday decline was an important low but is it THE low. Margin calls were being met and even safe-haven assets were for sale. Analysis using the rearview mirror is always more accurate than forward due diligence but less useful in charting the road ahead.


While many stocks may have already bottomed not every company is going to make it to the promised land. An event like this hits the most challenged companies hardest, especially those with debt they can’t service. The Coronavirus will likely accelerate some secular trends long established. The Amazon effect has forced the secular change in retail as America’s shopping habits move from big box to online. Those that met that challenge have been rewarded and those that haven’t will meet their end sooner than expected. Airlines are of course another obvious casualty and likely will have to be bailed out once again. Not unlike a wartime MASH unit market triage will determine which companies can be saved.

How I’m positioned and why?

In raging bull markets little attention is paid to the balance sheet. Once the revenue is turned off or even slows, the debt becomes a noose around the company and the vultures start to gather.

Most technology companies have market caps greater than their enterprise value indicating they have enough cash on their books to pay off any debt if they must. They have the same challenges as any company whose revenue slows or shuts down but can sustain a downturn far longer than most other industries.

Outside of Technology, Healthcare is part of the solution and in most cases have only modest debt levels. While some companies like Zoom (ZM) or Netflix (NFLX) may even benefit from the current landscape they will be the first-place investors will look to book profits once the crisis has passed.

On the other side of the spectrum Energy is the worst performer year to date and with good reason. Even before the COVID-19 crisis the world was flooded with crude. Technology had changed the industry moving the United States from net importer to exporter in the last decade. OPEC as a cartel like structure has been unable to fight off the decline and earlier this month Saudi Arabia chose the nuclear option. With a crude breakeven cost in the single digits they launched what they announced as price war with Russia but really was as much a targeted strike on the U.S. Energy complex.

There’s no Holy Grail indicator or crystal ball that’s going to give us an exact date the crisis is over. I do know that when the media starts reporting a decline in the infection rate stock prices will have already reflected the good news. This is not a traditional Bear Market created from consumer excess or an economy drifting into recession as employment rolls over. This is similar to a natural disaster causing a massive supply and demand shock. While the economy won’t be turned on at the pace it was turned off I expect once we start turning the lights on the pace of economic activity will pick up rapidly with a dramatic catch up in demand.

Signs of stabilization

Market swings are at least slowing and that’s a good sign. Waking to futures limit down or up is never healthy but expect higher than normal price swings. It’s going to be a while before sub 1% market moves become the norm again. VIX volatility levels are elevated but off the panic levels seen a couple of weeks ago.

The other side

One thing is certain. Regardless of the timing the other side of this crisis is going to look a lot different than when we went in. Globalization trends will be different. Companies are going to rethink supply chains and at the very least diversify across the globe. The siren song of China as both supplier and customer is changed forever. In the U.S. new protocols will be put in place wherever people gather. Airport security and even large buildings may include health checks even if it is as simple as a digital thermometer read out. These are only a few examples but I’m sure we can all think of others.

While the days and weeks ahead will be a challenge, I’m encouraged by both what I’ve seen from the private sector and countless Americans in some cases putting their lives on the line to fight this insidious disease.

Some companies have completely changed their manufacturing footprint to meet the demand of needed emergency equipment. A hockey equipment maker retools to make needed hospital face shields, car companies making ventilators or Abbott Labs (ABT) working tirelessly to invent a 5-minute virus test machine all point to something I always believed America was about. A country that ultimately comes together to meet any challenge.

*At the time of this post some funds managed by David were long ZM and NFLX