March 27, 2020
On Tuesday, March 24, U.S. equities had their best day since 1933. That +11% day was followed by the 9% advance of Wednesday-Thursday, so we’re talking a healthy, three- day 20% rally off the bottom. Unfortunately, given the disappointing New York City data,we’re not out of the COVID-19 woods yet, but how about the stock market woods?Frankly, given the severity of the current selloff, we’d call it a 50/50 ball (as they say in soccer), but some historical data suggest that the selloff’s end may be near.
Research is a big part of what we do, and lately, we’ve been spending a fair amount ofquality research time with the 2008-2009 archives. In that earlier period, of course, all the large company stock market indexes declined sharply in 2008, and then, as our jawsdropped, kept right on going. In fact, during the bear market’s last nine weeks, i.e., fromJanuary 1, 2009, until March 6, the large company Value indexes had a last gasp declineof 30% or so. That era’s 10-stock Yield Group, the backbone of our portfolios, declined about 33% during the same period (the more growth-oriented Momentum Group held up much better). Then, the work of the Grand Troika, i.e., Ben Bernanke, Tim Geithner, and Hank Paulson, and many others kicked in, and the S&P 500’s 666.79 of March 6, 2009, became the 3386.15 of February 19, 2020, which capped an exceptional 11-year run.
For sure, the entire 11-year period was exceptional, but, in 2009’s March-December period, the patient first had to learn to walk. In fact, those March-December days in 2009 were a sight to behold as the patient did start walking and the coiled stock market spring of 2008- 2009 uncoiled. The S&P 500 Index advanced 67% from March 6, 2009, until December31. But, that’s not the whole story. The Value side of the stock market had been hurt more than the Growth side during the early-2009 last gasp (see above), so that’s where the springwas really coiled. From March 6 until year-end, the most popular Value-stock index advanced about 72%, while our 10-stock Yield Group advanced over 100%.
Fast forward to March 2020. The COVID-19 selloff has been brutal, and once again, the Value side of the stock market has taken it on the chin versus the Growth side. No Grand Troika this time, but we do have the very capable duo of Steve Mnuchin and Jay Powell, each of whom learned from that earlier era that now is not the time to dither. Instead, it’stime to go in fast and go in big. One result: The Yield Group spring was uncoiled with a vengeance on Tuesday, Wednesday, and Thursday (March 24-26). Of course, three days doth not a trend make, but the rebound was more than impressive and, we believe, predictive. At some point, the selloff in U.S. equities will come to an end. When that day comes (if the stock market bottom has not occurred already), we will be very surprised ifthe 2009 history doesn’t repeat. That’s not to say we necessarily expect a rebound of thesame, 2009 magnitude, but a healthy rebound nonetheless. We say that because what we’rewitnessing in the COVID-19 market of March 2020 is eerily similar to what we witnessed in that earlier March. No guarantees, of course, but those 10 Yield Group stocks with an average current yield of 7% or so, it seems to us, are where real opportunity lies…wheretightly coiled springs are most likely to uncoil in noteworthy fashion when investors ultimately flip the stock market switch.