Updates, Tips, & Finance News

Round's Market Commentary

April 19, 2020

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This Week

Bear Market Rally

As we stated last week, we believe that we are currently in the middle of a bear market rally. In bear market rallies, it’s common to get a sense of FOMO while prices are going up.

We’ve seen bear market rallies in every previous downturn, and government spending alone will not fix unemployment overnight, nor will it save every business and industry.

It’s easy to forget about the structural issues when prices continue to go up, but once we start to see these structural issues take effect, news headlines alone won’t continue to push up prices. Many of these structural issues may start presenting themselves in the form of earnings revisions, missed expectations, defaults, and bankruptcies.

Before COVID-19, assets were priced to perfection because investors believed that there were no risks ahead and that growth would continue to accelerate. COVID-19 has thrown a massive wrench into the future expectations of the markets. Growth will be hindered, and uncertainty is heightened. When you combine these two issues, you should expect a steep discount when purchasing an asset, which we are just not seeing yet.

Quarterly Earnings

For companies who haven’t completely pulled their earnings guidance, many are filing for reporting extensions for releasing their Q1 earnings data as they figure out how to share with the world how the Coronavirus pandemic has affected their business lines.

Banks reported earnings this week to kick-off earnings season. Of the major banks that reported earnings this week, all have missed expectations. On top of that, they have collectively and preemptively, set aside over $17 billion of funds to prepare for a wave of companies they have lent money to default in Q2 (which started April 1st).

In the US economy this week:

  • Unemployment claims topped 5.2 million last week, sending the running total to 22 million claims, wiping out a decade of job growth.
  • Retail Sales fell nearly 9% in March, the largest decline since 1992.
  • Industrial Output dropped in March by the most since World War II.
  • Homebuilder sentiment fell 58%, the largest monthly decline in the 30-year history of the index.

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Looking Forward

The first wave of the COVID-19 sell-off was mainly due to speculation and driven by a lack of liquidity in the market. Or in layman’s, the price spiraled down because there just weren’t enough buyers to meet the volume of sellers. The US Federal Reserve has plugged this liquidity hole by stepping in and essentially becoming this buyer.

The next sell-off, which we believe is the next step in the cycle, will likely be due to structural problems in the economy, which we covered above.

We’re not alone in feeling cautious in the face of numerous disconnects and excess optimism. Many of Wall Street’s top names are on record warning of new lows to come.

While we don’t mean to be spouting all this doom and gloom, we want to reiterate to you that we’d rather err on the side of caution until we get clarity on structural issues. When the upside starts outweighing the downside, we will become an aggressive buyer.

Historic market sell-offs are some of the greatest times to be investing as these types of events can uncover value opportunities that only arrive once in a blue moon. However, patience is important in times of fear, not greed.

For many of you who happened to be underinvested during the last 10-year bull market from 2009 to 2020, this could provide a second chance that is often very hard to come by.

See you next week!

-The Round Team

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Disclosures: The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Forecasts or projections of investment outcomes in investment plans are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time. The opinions expressed by Round represent the current, good faith views of Round and are provided for limited purposes, are not definitive investment advice and should not be relied upon as such. Pictures and depictions of the Round app do not reflect the performance of Round and are not an indication of performance.