Working to Find a Bottom 

After a relentless month of selling, markets managed to string together a few positive days mid-week after breaking to a new low on Monday. In fact, the buying action was so strong that the Dow rose more than 20% in just three days and re-entered a bull market. The S&P 500 didn't see quite as strong of action and is up less than 20% from its lows. Despite rapidly rising case numbers and jobless claims that shattered previous records, it looks like the market is trying to find some footing. Still, we are certainly not out of the woods yet. Friday's market saw the return of selling with many of the talking heads calling for a re-test of the lows. We don't know exactly where this shakes out, but we know that market sell-offs often come in a "bang and a whimper." We might have seen the most intense selling action, but that doesn't mean that it is over. We'll be watching the fundamentals and technicals very closely. 

Under the surface, we've seen subtle signs of technical improvement. Equity correlations are starting to fall. This means that not all stocks are being treated the same and there is starting to be some differentiation between good and bad. We're also seeing market breadth dramatically improve even as sentiment breaks to new lows. The advance/decline ratio has been rising as the bull/bear ratio has been falling. Historically, this is often a contrarian condition that has been a positive signal for returns over the next 3 to 12 months. We've also seen credit spreads start to narrow a bit indicating that some of the stress in the bond markets has been eased by the Fed's response. 

From a fundamental standpoint, things are falling apart, but there is some hope on the horizon. We know jobs numbers are awful and that GDP and earnings are likely to get crushed in Q2. Still, we take some solace in the idea that the Fed and the government are unloading shock-and-awe stimulus. The dollars being pumped into the economy dwarf amounts from 08/09. Our friends at Strategas Research Partners have posed the idea that perhaps the Great Recession taught lessons that are preventing a depression this go around. The all-in response should hopefully allow the economy to get back on its feet once the virus is contained.  

So again, the question returns to how long the virus will be with us. We can't answer that for sure, but we tend to believe that social isolation is having some impact in slowing its spread. What we can control is ensuring that we have companies that are likely to weather this storm. Admittedly, we've been worried about a wave of dividend cuts given the unprecedented level of economic stoppage. However, after closer examination, we see most companies have ample resources on hand or access to enough cheap credit to make it through. Ultimately, we continue to believe they will come out on the other side and in some cases be even stronger. We'll continue to have our ear to the ground.