Capital 19 Catch-Up

One Year Anniversary of Covid Market Low Shows Just How Far We’ve Come

Tuesday marked the first anniversary of the coronavirus induced market low in what was one of the fastest moves to a bear market in history. Back in March of last year, the S&P500 took just 22 days to drop more than 30% as economic shutdowns spooked Wall Street and a pandemic, the likes not seen for more than one hundred years, swept across the globe. Luckily for those of us invested in the stock market the recovery back was also one of the fastest of all time, with the major indices positive again within just six months.

From that day a year ago, the S&P500 has now rallied 80% while the Dow has gained 75%. Despite its recent stumbles, the Nasdaq is still 90% higher than it was at the same time last year. It’s been a phenomenal comeback. And the good news for us is that it is likely to continue. After a big decline, such as the one we saw last March, when a strong bounce-back occurs it is likely to flow deep into the second year. While common sense dictates that it doesn’t rise as hard and as fast as the initial jump, it is common for the market to outperform during this period. The second-year rally is prone to more pullbacks, with an average drawdown of around 10%, but this can provide some great buying opportunities if you time it correctly. I’m excited to see what the next year will bring.

Markets at the moment seem to be in a holding pattern. Not least because of the conflicting stories surrounding the ongoing pandemic. On the one hand, we have vaccinations going on across the globe (everywhere but in Australia apparently), with the US Government confirming during the week that one in five Americans have already been vaccinated. And more good news from Astra Zeneca who stated on Monday that their vaccine is 79% effective in preventing symptomatic illness and 100% effective against severe disease and hospitalisation.

While on the other we have the World Health Organisation warning against an increasing number of infections in at least half the states in the US, and also across Europe and the rest of the world. On the weekend Germany announced they would be extending their lockdown until the 18th of April, while more than one-third of France went into lockdown over the weekend. It’s a healthy reminder that we’re not totally in the clear just yet. The latest outbreak here in Brisbane is a perfect example.

The good news is that we know that the good times are just around the corner and it’s only a matter of time before vaccinations ensure economies will be able to reopen and stay open. The markets know it too. It’s why despite all of the recent market swings the S&P500 closed at all-time highs on Friday. Once the earnings season comes to an end the market often stumbles its way into the end of the quarter as we wait for the new season to start. The quarter-end is only three days away now, with the new earnings season only a week or two after that.

Speaking of earnings, it was the turn of the infamous GameStop (GME) to announce its results last week and the results weren’t favourable to the host of retail investors who have piled into the stock in recent times. Revenue dropped to $2.12 billion, down from the $2.19 billion it made in the same quarter a year ago. Profits were also down at $80.5 million, with both the top and bottom line missing analyst estimates.

In the earnings call that followed the new leadership failed to offer any future plans to move away from bricks and mortar sales to an e-commerce model, and then promptly refused to take any questions. However, while the initial reaction to the share price was a fall of 33%, the stock then jumped 50% in the next session to show that the craziness isn’t over just yet. Other popular Wall street bets Reddit trades also jumped higher with AMC Entertainment (AMC) gaining 21% and Koss (KOSS) climbing 57%.

Also in the week, we had Treasury Secretary Janet Yellen and Fed Reserve Chief Jerome Powell appear before congress in their “virtual” Capital Hill testimony. They spent time talking up the strength of the economy and the expectations for economic reopenings to generate strong growth throughout 2021. Powell stated, “There’s going to be a very, very strong year in the most likely case. There are of course risks to the upside and downside, but it should be a very strong year from a growth standpoint”.

Later in the week Powell also spoke of eventually winding back stimulus measures that have been in place during the pandemic. He told the Morning Edition news programme – “As we make substantial further progress toward our goals, we’ll gradually roll back the amount of Treasurys and mortgage-backed securities we’ve bought. We will very gradually over time and with great transparency when the economy has all but fully recovered, we will be pulling back the support that we provided during emergency times.” A very cautious message if ever there was one.

The economic data also added to the signs of a growing economy. The weekly jobless claims dropped to 684,000 when economists were expecting 735,000. Hopefully, this will bode well for the non-farm payrolls at the end of the week. Core personal consumption also came in right on expectations curbing fears of out of control inflation. Year on Year it rose 1.4%, while it gained 0.1% month on month. The numbers helped the market rally into the Friday close.

In the week ahead we’ll be closely watching the drama in the Suez canal as the world’s greatest traffic jam lines up behind the 200,000 metric ton ship the Ever Given. The blockage is costing billions in delayed shipments, as workers will this week set to “unload” a number of containers into the sea to lighten the load. In the same region, OPEC will meet, with any big decisions likely to have a significant impact on oil prices.

We’ll also see earnings reports from Lululemon (LULU), Micron Semiconductors (MU), and Matthew’s favourite phone provider (and no one else’s) Blackberry (BB). The big car companies will report their sales this week, including Tesla (TSLA) who is expected to have shipped 162,000 deliveries in the quarter. Other data will include the ADP employment report, construction spending, and the non-farm payrolls on Friday.

Have a great week.