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.