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World War "V"

The letter “V”, and not the roman numeral for five, has been become the most common letter spoken in the last four weeks as we hear on an hourly basis of the virus and volatility (market) that is affecting every person in this world, in one way or another. The virus has been thrust upon the world as a new enemy, with no soldiers, that is present in all countries and dangerous to all. This enemy has created a global challenge that is affecting every person in the world as we contemplate the containment of the virus and the economic fallout as the world starts to self-quarantine and shutdown. The virus and unprecedented market volatility have created a global crisis that brings back bad memories of prior recessions (dotcom ’00 & financial ‘08), the Oct. 1987 stock market crash, the depression era, and the uncertainty and fear we all felt after 9/11. But I am quite sure we can all agree that after the initial shock and fears, that our country, the financial system and the people always respond well, and we always recover. So even though we see certain similarities from each of the previous crisis’ in the past 100 years, that we eventually overcome, and its never easy to see people suffer or to witness a loss of life.

In previous notes that began during the onset of the virus, we spoke of the different levels we were going to encounter if this crisis persisted and spread throughout the world. The first level was the upcoming supply chain disruption that was quite obvious as China is a major producer of goods. Second, we mentioned that a varying degree of demand shock was going to take place but that was closely tied to the spread and containment of the virus but also from the panic that would be created as individuals are forced to quarantine and businesses shutdown worldwide. Well I don’t have to show more facts of the demand shock as most of us are self-quarantining at home, as most businesses, stores and restaurants are closed except for essential goods. There are currently over 100 million Americans being ordered to stay at home. We are even seeing the borders of countries closed to all citizens, except for trade. We just instituted a shutdown of the Mexican border, which began on Saturday. We then stated that it was inevitable that if we progressed this far, that stock markets would react as they would start to price in, the large drop in earnings that is inevitable in Q1 and Q2, sharp increases to unemployment, and the success of containment of this virus. This is stock market volatility and economic fallout that will last many months. We hope to clarify some of these issues and to discuss some possible outcomes that are still quite difficult as the virus presents too many unknowns.

The Virus

  • New cases continue to rise in the U.S. as testing is being increased in all of parts of the country. We are currently over 31,000 cases with 390 individuals (1.26 ratio) that have passed away from this illness. The numbers are increasing quickly. We have updated these numbers many times as we were completing this report.

  • We will see a huge spike in new cases and hopefully the ratio of deaths to number of cases will continue to decrease, as we progress with containment that will eventually slow the number of new cases. There is still a high probability of recovery unless you are elderly or vulnerable due to illness as those groups should not be leaving their home except for essential needs.

  • We are hoping to follow the path of South Korea that contained the disease rather than Italy which has now surpassed China with the largest number of deaths and a ratio over 9.0%

  • We are seeing positive news out of Wuhan China, as they have not had any new cases in the last few days, even as citizens start to slowly adapt to a normal life.

  • Recently heard that China has created a new cell phone tracking system, in some areas, where they won’t allow people into an area where there are no infected individuals, if they recently left an area where someone had the virus. This includes constant temperature checks in new zones for fever.

  • Japan and South Korea are also seeing positive results with a smaller increase in new cases.

  • Several states in the country have called for a complete shutdown and we can expect that to continue, with a nationwide requirement not being a surprise.

The Volatility

  • We continue to see unprecedented volatility in the stock market as companies try to deal with many issues, including a complete shutdown of business.

  • As the chart highlights below, the market is at the highest levels of volatility hovering in the 60-80 range lately, while the 200-day moving average is near 18. Plus, we saw VIX levels rise each day during the month of March.

  • It is common to see the biggest moves in the market during a period of distress such as the depression era, in a recession, or as we have been experiencing the last two weeks.

  • We had three of the biggest daily moves in market performance in a short period this month (chart below).

Volatility Index (VIX)



  • But historically we have seen that after extreme sharp drawdowns or upswings, in the market, it is not uncommon to see wide swings in daily performance for a long period of time that can last many months. It’s like a bungee cord that contracts less over time.

  • It is also common that within a volatile market that we don’t see a true bottom until later in the pullback even if the VIX starts to lower its daily trading range. But lower does not mean at a more historical average.

  • For example, if we look at the 2008 recession. We saw higher VIX readings during the end of 2008, but we did not reach a market bottom until 3/9/2009, when the VIX levels were slightly lower. We continued at abnormal levels for several months after this bottom (chart).

Volatility (VIX)


S&P 500: March 2009 bottom


  • This past week was one of the worst as the market was down -17%.

  • We are seeing a large sell-off in all assets as roughly $90 billion was moved into cash this week

  • The S&P 500 is down -28.69% YTD as of 3/20/20, and -31.93% since the all-time high closed at 3386 on 2/19/2020 (chart).

  • But the market is still up 240% since the 2009 bottom, even with the massive moves we have seen in a few weeks.

S&P 500 (SPX)


S&P 500 (SPX)


  • Technically we closed below the 2351 level which we saw on 12/24/2018 which is a key support level that we have broken. We never saw a retest of this level since 2018 so it was not surprising to hit it during the latest weakness. We suspect this will be retested again this week.

  • The next level that concerns us is at 2080 which is the breakout range we saw in late 2016 after the BREXIT crisis pulled down markets.

S&P 500 (SPX)



  • We are the midst of a recession in the U.S. and one can argue the details and numbers. Since the Feb. 19th high, we are now down about -32% in a matter of four weeks. This is an extremely sharp drop.

  • There is an economic fallout that is coming over the next few months and its highly probable that the market could drop another 10-20% lower, if we don’t see a slowdown in new cases over the next few weeks. This will not occur in a straight-down manner and could take more time.

  • The market has already priced in big drops in earnings and GDP, for both Q1 and Q2.

  • Its impossible to project the Q3 and Q4 damage to our economy as it really depends on containment.

  • If we see proper containment over the next two months, its possible that we will see some form of normality start to show up in the markets as it will start to price in a rebound. But that won’t happen until the second half of the year.

Economic Fallout

  • There will be an immediate surge in job losses and the unemployment rate as we are currently witnessing massive layoffs in the millions, as businesses close.

  • We are likely to see 2-5 million laid off in the first month

  • Unemployment rate will likely reach 10-15% very quickly, and could even reach 20%.

  • Its critical that the administration continues to provide trillions of economic stimulus, for individuals and businesses to cushion the shutdown as we try to manage through it.

  • There is a stimulus package for companies and workers being held up tonight by the Senate as Democrats are looking for assistance to workers, rather than companies.

  • We don’t believe this job weakness will last through the rest of the year as we should see a quick economic jump-start during some part of Q3 and more likely during Q4 of this year.

  • You can guarantee that there is no limit to the amount of money that will be thrown at this crisis.

Federal Reserve

  • The Fed has also been active with a couple of rate cuts as the Fed Funds rate dropped to 0-0.25%. We don’t expect to go lower than 0% but we would not be shocked at this point.

  • Fed is also offering trillions of capital to stabilize issues in the REPO and bond market that has seen many issues since late last year.

  • They are allowing $1 trillion of capital to be available every night for overnight funding.

  • We continue to see market dislocation in some assets classes as there have been several days during the past two weeks, where stocks, corporate bonds, treasuries, and gold all dropped significantly lower in a single day. This is not normal, but we are seeing some signs of adjustment as the Fed is pouring in more fiscal stimulus.

  • Also, the 10-yr treasury is going through some wild swings that are not typical. We could see the 10-yr yield near or even hit zero as we join other countries in that low range. But we would not be surprised to see a higher yield by mid-2021 that is above 1.50%. This is where bond investors should look closely at positions that could see a sharp downturn in prices as yields rebound next year.

  • There are rumors of mass liquidation from some risk parity hedge funds who were also over-leveraged along with hedge funds that were trading treasuries long and short that was also adding to the unusual bond liquidity.

  • We believe the Fed will continue to stabilize bond markets.

Some Positive News

  • We expect the containment will slowly start to work and hopefully we will see a slowdown of new cases as we saw in China.

  • The economic fallout will be key to watch and the transition of a complete economic shutdown into a jumpstart back to normality. This will be painful but probably short.

  • We cannot predict what will happen with a vaccine, but there are 20, or so, companies working diligently to develop a vaccine. There has to be a therapy or vaccine as soon as possible that will help to deter any re-infection as we try to get the economy up and rolling again.

  • The market will start to show signs of strength before the economy recovers.

  • The chart below shows how in March 2009 that the market started to recover one quarter prior to a positive reading in quarterly GDP for the U.S.

  • We expect a similar situation to occur this time and maybe even sharper rebound as the drawdown was much more severe and during a shorter number of days.

S&P 500 vs U.S. GDP (Quarterly)


  • Our banking institutions are very well-funded this time, and much different than in 2008 where we had a global financial crisis.

  • The U.S. economy, even with this new shock is quite strong and should rebound quickly.

  • Our strongest companies will see two or three bad quarters of earnings, but their stock prices and valuations will be very favorable and similar to what we saw in 2009, 2016, and 2018.

  • Over the long term the market is positioned for another long bull run as the technology revolution has not gone away as we are still in the early innings.

  • We have stated to clients and we still believe that managing risk exposure is much more critical here, than searching to buy beaten-up stocks. We started early in the crisis as we began to mitigate our risk exposure as were pointing to the dislocation in REPO rates that we saw in September and the market surge since then until mid-January was purely a liquidity rally as the Fed was buying short term securities since late last year. The 4-5-month surge was not based on growth or earnings.

  • We have not been purchasing stocks, or “nibbling” as is often heard on business channels all day long as there is plenty of time as we have a probability of a higher risk environment as the economic fallout expands and the unknowns are still quite high. If you followed some of the well-knowns pundits on TV and were buying stocks in February well, you now have a 20% lower price to buy. We don’t believe that is proper portfolio management by ignoring an extreme risk scenario. An important chart that they won’t show you is the percentage that it takes to recover from a loss (chart below).

  • We have been hedging appropriately and made some shifts in equities that we consider as we adapt to a “work-and-stay home” short term economy. But we maintain a low risk profile at this point in all of our portfolios.

  • Some people we know have been asking us about a widely spread message that many advisors speak of “just holding for the long term” and again we caution investors to review their financial picture as some may be at a more critical stage in life where more losses might be quite detrimental considering the time to recover losses.

We welcome all questions and comments. Please be safe and consider helping or even thanking someone who is playing an essential role like our medical professionals putting their lives at risk every day.


John Anagnos

Managing Principal

Chief Investment Officer


3828 Kennett Pike

Suite 212

Greenville, DE 19807

Office: 302-543-4446 Fax: 302-510-4166


Aetolia Capital, LLC (“Aetolia”) is a Registered Investment Advisor ("RIA") registered with and resident of the State of Delaware. Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. Aetolia renders individualized responses to persons in a particular state only after complying with the state's regulatory requirements, or pursuant to an applicable state exemption or exclusion.

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