If, on January 1, 2020, anyone was to suggest the jobless rate would approach 25%, a pandemic would lead to something close to a shutdown of the global economy, over 100,000* U.S. citizens would be dead, etc., etc., no one would believe the S&P 500® Index would only be down by 7%. No one.

We believe it is important to understand why this is the case. Why are stocks down only 7% when we are seeing economic data that eclipses that which we saw during the Great Depression. The answer, we believe, is summed up in one word; “liquidity.”

The actions of the government (fiscal stimulus) and the Federal Reserve (monetary stimulus), has injected an unprecedented amount of liquidity into the market. This liquidity has come in the form of cash payments to individuals, deferred payments on student loans, purchases of stressed debt, lower interest rates, etc.

Additionally, corporations have stepped in to provide liquidity. When Bank of America (along with many other banks and financial institutions) decided to offer payment deferrals to their credit card and mortgage customers, this acted as a form of stimulus to the economy…..at their expense.

Furthermore, while liquidity plays a significant role in stimulating the economy, there are other factors that influence investors that should be understood. Notably, we see the COVID event as something closer to a transitory event, like a “natural disaster,” than a structural event like a “depression.” This means the “event” will be over quickly as opposed to a structural collapse.

Will the fiscal and monetary stimulus be enough to bridge the gap between the shutdown of the economy and its return to “normal?” It is too soon to say, but we think so.  Since the beginning of March, approximately 10% of U.S. GDP has been lost due to the shutdown. Between the Federal Reserve and Treasury, approximately 14% of GDP has been injected into the economy in the form of stimulus.  This means there is a real chance it will be enough. At least enough to prevent a depression or even a severe recession.

The Federal Reserve deserves a lot of credit for the speed and aggressiveness of its response to the crisis. That stocks have rallied more than 38% from the day Chairman Powell told the world that the Fed would do whatever was necessary to prevent a depression, is proof of this.

Make no mistake. The time will come when the cost of such decisive action will need to be paid in the form of higher taxes. However, this price is much less than the price paid in the form of permanent job losses, bankruptcies, investment losses and death due to psychological and health issues. That was the price paid during the Great Depression.

The question on the mind of many investors is whether stocks are poised to “crash” under the weight of the economic damage done by quarantine or rally to all-time highs on the back of the unprecedented stimulus? Why not both? Since a “crash” has already happened (March 2020), it might just be the case we see all-time highs later this year. There is a reason why Mt. Whitney, the highest point in the U.S., is near Death Valley, the lowest point in the U.S. Extremes tend to congregate whether it is in geological or economic terms.

Whether stocks hit new highs this year or not, the fact remains that stocks have bounced back in dramatic fashion from the low on March 23. Below we look at a few charts we think help frame the explanation for why this is.

Income Higher

In this first chart we see a spike in month-over-month personal income. The rate of increase is the greatest in more than 70 years. This is despite a shuttering of the economy and an unemployment rate in excess of 20%.

Spending Decline

This chart shows a decline in consumer spending that dwarfs any period over the past 60 years. So, despite an uptick in income, consumers reduced spending across the board.

Spending Collapse and a Spike in Income

In the chart below, brings together the previous two charts. It shows how spending and income typically track one another closely. Not this time. It clearly shows that consumers froze in response to the pandemic and despite spike in income. When this happens, it should lead to an increase in the savings rate.

Savings Rate Increase

As the chart below shows, an increase in the savings rate is exactly what happened. The chart below spans 60 years and shows how dramatic this spike in the savings rate is.

During the years noted by circle #1 (early 1970’s), personal savings increased. This period was marked by economic weakness, high oil prices, political turmoil, and rising inflation. The savings rate declined steadily until it bottomed ahead of the Great Recession in 2009. This period is highlighted in circle #2. After this “near death” financial experience, individuals ratcheted up their savings. As a result of the pandemic, savings skyrocketed to levels more than double that of the early 1970’s. This is shown in circle #3.

So, with these charts, we see that consumers have frozen spending, increased savings all while seeing an uptick in income. The answer to the question, “Where did the increased income originate?”, is Uncle Sam, that is where.

The $2.3 trillion CARES Act along with enhanced unemployment payments, forbearance from landlords, banks and credit card companies has allowed individuals to not only “stay afloat” during this shut down, it has increased liquidity. It has increased the amount of available liquidity above what would otherwise have been available sans the pandemic.

This helps explain why the number of businesses going bankrupt has been limited (so far), why car sales are brisk, new home sales are strong, stocks are rallying, and inflation is starting to appear. We are now in the “show-me” stage of the recovery. We expect plenty of opportunity ahead.

In conclusion, we expect the S&P 500 Index to hit an all-time high this year. Volatility will remain an enemy of discipline. For our clients, we will remain disciplined, attentive and humble as we navigate markets on their behalf.

On a final note, we welcome anyone interested to watch our weekly review of the market. Please watch for our Zoom video invitation to watch live or on demand.

Sincerely,
Kessler Investment Group, LLC

Today, stocks are building on yesterday’s gains. Yesterday’s gains were dramatic against the backdrop of the prediction that this will be the “worst week for COVID deaths”.

Our thesis has been to expect stocks to “bottom” ahead of COVID “peaking”. We believe the low is in for stocks and that low occurred on March 23. This was the day we saw the Fed go “all in” on monetary policy. They effectively told the bond market that there was no limit on the liquidity they were going to deliver. Additionally, after a false start, Congress promised a fiscal stimulus plan like none we have ever seen.

The old adage “Don’t fight the Fed.” is used when the Federal Reserve changes its posture to either an “easing” or “tightening” posture. This may seem quaint to some given the frequency of Fed actions over recent years. However, when the Fed brings their “big brother” (U.S. Congress) to the “fight”, it makes sense to take them seriously.

When fiscal and monetary policy is brought to bear on a financial crisis, we pay attention. There is a magnifying effect when both are combined which is something we did not see during the Financial Crisis. We expect this effect to be significant to the odds of a substantial recovery for the economy. Effectively, it is the government “blowing air” into our financial lungs as we hold our breath.

As for stocks, the S&P 500 is bumping up against the 2,750 level we identified a couple weeks ago. This level is near the midway point of the February peak and the March low for the Index. So, it is not surprising we have seen a bounce to these levels. We think there is still some room to the upside but it will not last indefinitely. A brief pullback should be expected.

While we do not expect the March low to be breached, we do expect stocks to “feel” like they will. It would not surprise us to see the S&P 500 return to the 2,450-2,500 level before turning higher once again.

For now, we feel comfortable that stocks will grind a bit higher. So, we will use this as another opportunity to scrutinize the holdings in our managed accounts to make sure we are comfortable with them for the post-virus recovery that is coming.

We will have more to share on our Friday webinar, so please tune in.

Sincerely,
Kessler Investment Group, LLC

In a surprise move, the Federal Reserve has cut interest rates by 1% to 0% and embarked on a round of quantitative easing “QE” that has not been seen since the Financial Crisis and never this much in one day. Despite such an unprecedented move, stock futures are currently trading down.

The news surrounding the Coronavirus continues to be on everyone’s mind and affecting all of us in virtually every part of our daily lives. As a result, it is easy to see why financial markets are under stress. Due to social distancing, self-quarantining, shuttering of public places and wide-ranging cancellations, the market is struggling to react to the economic stimulus.

The real friction point for markets lies between the effort to accelerate economic activity while at the same time dealing with the need to completely shut down economic activity. Historically, monetary and fiscal policy has been designed to increase economic activity. However, in response to this crisis, health officials are pushing for the exact opposite. So, effectively, what the government is attempting to do is blow “air” into our “lungs” as we hold our “breath” waiting for the virus to run its course.

This tug-of-war between growth and quarantine will ultimately be won by growth. Do not lose sight of this reality. Nothing, virus or otherwise, will prevent economic activity from getting back to normal once the threat has subsided. Yes, there will be permanent changes to our behavior in response to this pandemic. The likely changes will be the kind that lead to a cleaner and healthier world. They will make traveling, gathering and living a cleaner, and therefore healthier, experience.

It is also important to recognize that many of the changes to behavior following the financial crisis are on display. Following the crisis in 2008, individuals reduced their debt to equity ratios. Banks increased their reserves and decreased their leverage. As a result, the banking system and individuals are entering this crisis in a stronger financial position than they did 13 years ago. Additionally, the Federal Reserve has learned moving faster and more boldly will lead to a better result than tip-toeing toward a response.

Our view is that economic activity will pick up soon. Markets do not need for the virus to be completely eradicated to begin their return to normal. They simply need to get to a point where the slowdown has been “baked in” to stock prices. Once this has been accomplished then the stimulus injected into the economy will truly have its effect.

We believe patience will be rewarded for investors. Here at KIG we are scrutinizing our holdings for clients to make sure we have holdings we believe will be solid ones for the recovery. Regardless of quarantine, social distancing or any other measures to contain the virus, nothing will contain our dedication to clients and their investment portfolios.

Sincerely,
Kessler Investment Group, LLC

• Coronavirus will grip the country, and the world, for months to come.
• A full-fledged recession will occur in the United States this year.
• The oil industry will see major bankruptcies in the wake of oil going to $20 a barrel.
• There will be no response by the Federal Reserve or Congress that addresses the pandemic.

In other words, the current price of stocks assumes all the items listed above become a reality. Not that there is a risk of them occurring. Rather, that they will occur.

What makes sense to us is that the Coronavirus will grip the country for months to come even after cases peak. We have written that a recession is likely in the next twelve months so seeing one occur sooner as a result of Coronavirus is not surprising. It is likely we will see weak oil companies tied to the fracking industry seek bankruptcy.

However, no response from Washington is a bit too much to expect. Despite the obvious rift between the Congress and the White House, we expect a joint effort to take shape very soon. It will be this response, barring a sharp downturn in Coronavirus cases, that has the biggest effect on markets.

As we have written, this is a health crisis that has morphed into a financial crisis. The health crisis will undoubtedly be remedied before deaths reach levels like we see with influenza. A vaccine will be developed by the medical industry. The only question that remains unanswered regarding the vaccine is, “When?”

So, with stocks having priced in virtually everything listed above, the one item that can, and likely will, change direction is the government’s response. Maybe this is a bit of a cynical view of the government, but rarely has it ever made a perfect response to a crisis. Yet, they do eventually move toward a constructive, if not good, response. The Financial Crisis is a good example of a major crisis that took a few attempts by the government before the crisis was addressed. Coronavirus will unlikely be any different.

Expect a major move by Congress and the White House to address markets. It will not deliver a vaccine for the virus, but it will deliver a “vaccine” for the economy. When this happens, expect stocks to rip higher. Maybe not in a straight line and never look back. But, do expect a significant rally to put the financial part of this crisis in the rear-view mirror.

This is the time to remain patient as the market digests the shock of the Coronavirus and before a concerted response by the government is implemented. The market “knows” that more cases will be reported. It knows the “peak” has not yet been reached. However, the underlying economy remains strong and, despite major disruptions to travel and public gathering places, a return to normalcy will begin to take shape soon.

Sincerely,

Kessler Investment Group, LLC

The “Weekend Effect” is the name given to the phenomenon when Monday follows the trend set on the previous Friday (like today). But does this mean Monday’s are the most likely days of the week to see a “bottom” in stocks? Well, maybe.

Our friends at Bespoke provide some data to consider. They looked at all 5% declines that have occurred on Monday’s since 1952. There have been 9 such Mondays and, in every case, the following day saw an average gain of 4.2%. Six months later, 8 of the 9 Tuesday’s saw higher prices with an average gain of 12.75%. Of course, these past results do not indicate future results. We will just need to wait and see.

Today’s stock action “felt” like a bottom is either in or nearly in. In last night’s missive, we warned that today would be a tough session for stocks. Oil stocks plummeted by 30% or so. Bank stocks declined by double digit percentages. These declines are like we saw during the financial crisis…..despite the fact we are not in a financial crisis.

This does not mean stocks turn around and higher from here and never look back. However, we believe it is constructive to future gains. This decline will prove “healthy” for stocks in that much of the excess has been wrung out of the “highflyers.” Something we anticipated would occur following the election but has been pulled forward as a result of Coronavirus.

Here is what we expect. First, a response from the President is necessary in the next day or two. Markets hate questions marks. While no one can completely answer the question of when the virus will run its course, a strong response and comforting tone from the White House will do much to lessen the fear. Leaders from Wall Street have been summoned to the White House later this week. It is likely a formal response will be forthcoming.

Second, investors must get a sense that the public response to the virus has peaked. This seems to be approaching. With the cancellation of many high-profile events it is becoming clear that the fear of being cavalier is greater than the fear of being…well, fearful. Locally, Avon school district has decided to close completely for 2 weeks. A reaction that would have seemed impossible to imagine just a few days ago now seems more reasonable since a student has been afflicted. My beloved MotoGP and Formula 1 motorsports have seen the first two races of the year cancelled completely. Princeton University has advised students to just “call it a semester” following Spring Break and not return.

Once these cancellations show signs of declining, it will signal the extreme behavior will be behind us. This will signal to markets that the uncertainty that has impacted investor behavior will be waning. Just as it is darkest before the dawn, so to will be the doubt surrounding Coronavirus.

Expect commercial-free specials on CNBC covering the “Crisis of Coronavirus” to be replaced with regular programing. Expect Coronavirus to take its place as the “event” that led to any number of healthy behaviors we will grow more familiar with as we travel. Finally, expect a violent market reaction to the upside surrounding this inevitability.

We continue to scrutinize the companies we own in our managed accounts. Despite the declines that have impacted these stocks, we remain convicted in our holdings. We believe consumers will continue to make online purchases, use gasoline, buy airline tickets, use pharmaceuticals, go to the movies, etc. Therefore, we believe companies like Amazon, Apple, Microsoft, Boeing, Delta Airlines, Disney, Eli Lilly, etc. will endure and grow into the future.

Sincerely,

Kessler Investment Group, LLC

In response to this move in oil, S&P500 futures are trading down approximately 4%. Much can happen between 9:30pm and 9:30am when stocks open for trading. But it is likely we will see a sharp drop in prices when stocks open for trading.

This is not too surprising for us. Recall in our last commentary we reminded readers that stocks do not typically bottom on Fridays. This axiom continues to prove true. Another axiom will likely prove its worth soon. That is, “Don’t fight the Fed.”

The Fed cut rates 50bps (one half of a percent) in the last week. Following this cut we suggested they were not done with their effort to stimulate the economy. We maintain this view and would not be surprised to see the Fed take further action this week. Additionally, we would not be surprised to start hearing about fiscal stimulus packages being put together by the White House and Congress.

What we believe is most important for investors to keep in mind is how transitory this exogenous force on the economy will prove to be. The virus is spreading but is not going to survive much longer simply because of the change in weather, if not due to the change in behavior from the global community. Further, while the virus is spreading, it is not leading to death rates which have characterized any number of human events. Events such as war, other viruses, chronic illnesses, poverty, etc. Yet, the world is reacting to this virus as though a significant percentage of the world population is at risk of death.

Make no mistake. The Corona Virus is serious business and can lead to death, especially among the elderly and those with underlying health issues. But it is unlikely to remain a pandemic for years to come.

So, what will the post-virus world look like? This is an important question for investors to ponder.  Since this is the first pandemic to see such a dramatic response from the global community, we expect governments and consumers alike to adjust their behavior. It is likely that future pandemic threats will be handled more effectively. It will likely lead to greater coordination among all countries. Simply put, it means human behavior will likely change in a way that makes it harder for future pandemics to spread in the same way as Corona Virus. This would be a positive for economic growth in the future.

For now, we must wait for the pandemic to slow. We must also wait to see how governments and central banks will react. It is the response from governments and central banks about which we have more confidence. It is unlikely that these institutions are going to sit idle as markets melt down. While these actions will not have a direct effect on the virus, they will have a direct effect on consumers and investors. When the virus has passed, the effects of government stimulus will remain.

We believe when it becomes evident that the virus has been “contained” and government stimulus has been injected into the economy, stocks are going to move substantially higher from where they are today. Consumer behavior, while it will be more regimented toward cleanliness, will return to a close resemblance of normal. The economic effects of the virus will fade quickly from recessionary to limited.

The financial system, as a result of responses to the Great Recession of 2008, is strong. Bank reserves are significant and prevent the economic slowdown from spilling into another banking crisis. The financial health of consumers is better than it was in 2007 before the Great Recession took root.

Remain patient as this storm passes. It will pass. The economy will strengthen from the effects of the virus. Stock markets will reflect an improvement in the economy as the virus runs its course.

Sincerely,

Kessler Investment Group, LLC

Considering the breath-taking volatility this week, the above stock market axiom seems appropriate to share. Stocks remained slightly negative on the day but rallied strong into the close. While the strength of the rally into the close is no where near an “all clear” signal, it is certainly more positive than if stocks had closed on the low of the day.

While the volatility is unsettling, or even scary, to investors, it is important to understand what is happening rather than speculating on what could happen. This means addressing the elephant in the room. Is this the beginning of another 2008/9? The answer is emphatically, no!

The Financial Crisis was a systemic crisis set off by an ENDOGENOUS catalyst (Housing market). In other words, it was a crisis that originated from within the financial system. The banks became too leveraged and the use of derivatives amplified the risk to the financial system. As banks/lenders failed the ripple effect was dramatic.

What we are experiencing now is a crisis set off by an EXOGENOUS catalyst (pandemic). In other words, the threat to the economy and markets comes from outside the system. The Coronavirus will pass. Even the most apocalyptic view acknowledges that the virus will pass sometime soon. This means the time when Coronavirus is a “non-issue” is right around the corner.

In our last letter to clients we point out one of the issues is that Coronavirus is a “pandemic” and not an “epidemic”. This means the virus spreads across boarders rapidly and affects everyone. Whereas diabetes is an epidemic. This means the number of cases is increasing rapidly but is not transmitted across borders. So, even though cancer and diabetes have led to the death of more people than Coronavirus this year, the economic impact of Coronavirus is far greater. This means, as a money manager, I am less concerned with the mortality rate of Coronavirus than I am the impact it has on the economy.

The threat of contracting influenza, cancer or diabetes does not impact the way consumers behave in the short term. Sure, the threat of diabetes will lead consumers to eat healthier, but it will not affect their travel schedule. The threat of Coronavirus will lead to the cancellation of travel, events and any number of economic events.

So, what does this mean to stocks? Well, we continue to believe the low is nearly in for stocks. The economy will slow and might even slip into recession. We believe stocks have discounted most of this risk. The jobs report today affirmed that the underlying economy is strong. The Federal Reserve lowered interest rates and is likely not finished with injecting stimulus into the economy. These factors will lead to a significant rally in stocks in the weeks/months to come.

Our baseline view for 2020 was one that pointed to strength in the economy until after the election. We felt negative influences on the economy would converge in late 2020 and lead to a recession in 2021. Well, maybe this “exogenous” force has pulled forward the recession into 2020. We are unsure at this point but willing to adjust our forecast to align with this view.

If the recession happens this year, rather than next, then we think stocks have adjusted to this reality. We continue to believe the Coronavirus will come and go. We believe the economic effect of consumers reacting to the virus will come and go. We also believe the strength of the U.S. economy is here to stay for some time to come. This means we are optimistic for the economy and stocks.

Today, for our managed accounts, we bought an airline stock. While there is no doubt that airline travel will be curtailed, it is not going away. Once the cases of Coronavirus peaks, we believe air travel will begin to pick up. Oh, and the price of oil has declined precipitously. This is one of the most significant expenses for airlines. So, when travel picks up it means airlines will be operating more profitably than ever before. We also continue to like our investment in one of the two major aircraft manufacturers in the world. It is unlikely that airlines cancel any orders as a result of this virus.

Unbelievably, as a result of the Fed cutting interest rates, homeowners can refinance (once again) and cut their debt expense. They might even take out a little equity and use it to buy a car or a refrigerator, or a second home, or whatever. Regardless, the consumer is being given another opportunity to increase their spending.

This crisis is about to get worse in terms of the number afflicted. However, it is unlikely that this virus will be around past April. This means the peak number of cases is going to be seen sooner than later and this is when the market will turn decidedly higher. Our prediction is that by July the national conversation will be over the election and rising interest rates rather than Coronavirus.

In conclusion, it is worth noting that the Chinese stock market has rallied over 6% from the low last month and now sits at a yearly high. So, the country where the virus originated has seen its stock market rally to new highs following the steep selloff it experienced when the virus became news. It is not unreasonable to think something similar could occur here in the U.S. So, while stocks may not have bottomed on this Friday, we expect it to happen soon. This means stocks are poised to go higher sooner than later in our view.

Sincerely,

Kessler Investment Group, LLC

Many have been critical of the Fed’s move to lower rates by pointing out this is a health crisis and a cut in rates does nothing to address the virus. Our view is that while this is a health crisis it is masquerading as a financial crisis. In fact, it is only a mild health event when compared to influenza or cancer or any number of other illnesses. What makes this a financial crisis first and a health crisis second is behavior.

One way to think of the behavioral effect is to consider what happens when a run occurs on a healthy bank. Once the run begins it makes no difference that the bank is solvent and healthy. The hysteria leads to massive withdrawals and a self-fulfilling prophecy is the result.

Make no mistake. The virus is real and some who have contracted it have died. What makes its effect more dramatic than that of cancer or influenza or diabetes or other deadly illnesses is that this is a pandemic and not an epidemic. Pandemics are rare while epidemics are more familiar. Think airline crashes versus automobile crashes. One happens rarely and affects a small number of people while the other is a more common occurrence that kills many more people. As a result, the masses react differently with a pandemic than they do an epidemic. This is what matters to the economy and markets.

So, we have a health crisis that has morphed into a financial crisis. What now? Well, the good news is that the virus should run its course by the end of April. However, enough damage will be done to the economy by then that the effects must be acknowledged. The biggest question if the ripple effects of consumer and supplier behavior will lead to a recession.

We feel that most of the market effect has been felt. Yes, we will likely see stocks spike up and down while ultimately muddling around for the next few weeks. However, most of the downtrend, we believe, has occurred.

The chart below does a good job of showing just how strong the pandemic’s effect has been on the market. As you can see, it is rare for stocks to decline 10% week-on-week. This has only happened 6 times since 1930. Coronavirus is associated with some of the most devastating economic events over the last century. That it gained notoriety in only the last 3 months speaks to how significant this event is.

The one thing every event listed above has in common is how stocks reacted in the months and years to follow. There is no guarantee that past performance predicts future results. So, it is important to keep this in mind in the weeks and months ahead.

There are a few factors lining up that suggest to us stocks are poised to rally in a strong way and soon.

• The virus is affected by warm weather. It is expected to go away by the end of April. This means stocks could have already discounted the negative impact of the virus on the economy.
• The underlying economy remains strong. Manufacturing, employment, housing and consumer demand remain strong. There is little evidence to suggest the virus will permanently affect behavior in a way that leads to a recession.
• The Federal Reserve has lowered interest rates aggressively and will likely cut further. While they only act this aggressively in the midst of a market meltdown, once they do so, stocks react well.

So, we encourage clients to remain patient as this plays out. Investors who sell into this volatility may feel comfortable for a short period but it might not be long until stocks regain their footing and head higher. This could leave investors with the prospect of buying back into stocks at a higher price or frustrated by never getting back in at all.

For our managed accounts we have taken advantage of the selloff by using the cash we raised in January during the run-up to buy stocks. We have purchased a major media company with a dominant streaming service, a leading industrial company, an energy company and a technology company. This leaves us with enough room in the portfolio to add one more stock before reaching a “fully invested” posture. This shows our conviction that, while stocks may dip further, the selloff has given us the opportunity we were looking for to buy.

Sincerely,
Kessler Investment Group, LLC