Summary
- The most pessimistic analysts fear that the COVID-19 crisis will bring about an economic dislocation comparable to the 1930s, or at least 2008.
- The stock market has been saying that investors don’t believe this hypothesis.
- “Other” factors seem to do a better job of explaining this year’s bearish market action.
Image By peshkov – Adobe Stock
Q1 2020 hedge fund letters, conferences and more
More seasoned market observers have been scratching their heads as to why, after the initial hiccough, the recent bear market curbed its losses to the point where those losses, at least to April 17, 2020, look like nothing more than a speed bump. (All “year to date” figures are from December 31, 2019 to that date.) If COVID-19 is an existential threat to the global economy and markets, one would never know it from the behavior of the indexes such as the Dow. In all fairness, stock price action to April 17, 2020 hasn’t been exactly bullish, but neither does it reflect a 2008 level recession, let alone a depression. Instead, this seems to be more reflective of relatively isolated issues with one or more sectors, with the full year 2015 being the nearest comparable.
Impact Of The COVID-19 Crisis
The COVID-19 crisis was so dramatic that it pushed the other major economic story off the front pages: the collapse of oil prices globally. But looking at the market action instead of the news, one would think that the latter is the main factor causing the market fall, as was the case in 2015. Breaking down the performance of the Dow index in 2020 year to date, and full year 2015, and 2008 by sector, and starting with energy, one can see how this might be the case:
| Sector: Energy | 2020 YTD | 2015 FY | 2008 FY | |
| Chevron | -27.7% | -19.8% | -20.7% | |
| Exxon Mobil | -38.1% | -15.7% | -14.8% | |
| Sector Average | -32.9% | -17.8% | -17.8% |
For this sector, the current year is the worst, by far, than both 2015 and 2008. And it’s no wonder, because oil prices have fallen by as much as three quarters, so far in 2020, versus one quarter in 2015, and slightly more than one half in 2008, bottoming in the low $40s and low $30s respectively in the other years. Both the underlying shock and the weakness of the associated equities, go a long way in explaining the year to date fall in the indexes. (Price and index data are sourced from the Dogs of the Dow website, and the sector averages assume equal weights for the stocks in the sector.)
Another hard-hit sector, industrials, is more of a mixed bag:
| Sector: Industrials | 2020 YTD | 2015 FY | 2008 FY | |
| Boeing | -52.9% | 11.2% | -51.2% | |
| Caterpillar | -21.2% | -25.8% | -38.4% | |
| Dow/Dupont | -38.9% | -9.9% | -42.6% | |
| 3M | -8.9% | -8.3% | -31.8% | |
| Raythoen/United Technologies | -25.2% | -16.5% | -30.0% | |
| Sector Average | -29.6% | -9.9% | -38.8% |
In this group, Caterpillar (CAT) and 3M (MMM) are doing about as well as in 2015, and much better than in 2008. The two defense contractors, Boeing (BA) and Raytheon/United Technologies (RTX), seem to be on cycles of their own, although their 2020 performances are comparable to those that existed in the recession conditions of 2008, and worse than in 2015. The last comparison, between Dow (DOW) (in 2020) and Dupont (DD), its predecessor in the index in the other two years, before their merger and spin-off of Dow, is skewed by the fact that Dow is more of a commodity chemical company, and hence more economy sensitive.
Financial Sector Gets Hit Hard
Another hard-hit sector is financials.
| Sector: Financials | 2020 YTD | 2015 FY | 2008 FY | |
| Am Express | -29.8% | -25.2% | -64.4% | |
| Goldman Sachs | -21.2% | -7.0% | -59.2% | |
| JP Morgan Chase | -31.7% | 5.5% | -27.1% | |
| TRV (Citigroup in 2008) | -23.3% | 6.6% | -77.2% | |
| Visa | -9.8% | 18.3% | n/a | |
| Sector Average | -23.2% | -0.4% | -56.7% |
American Express (AXP) stock is down only slightly more in 2020 than in 2015, and much less than in 2008. JP Morgan Chase (JPM) is doing worse than in both 2015 and 2008, which reflects, among other things, greater energy exposure than the other concerns. The other financial stocks are down somewhat more in 2020 than in 2015, but much less than in 2008. In most cases, the fee-based servicing businesses are doing fine, but the “deal” businesses (lending and investment banking), have taken a hit. Financials tend to get hit harder than most others in a “real” recession like that of 2008. Warren Buffett likes to buy them in such hard times.
Now we turn to a sector, technology, where the story is very different from the three above.
| Sector: Technology | 2020 YTD | 2015 FY | 2008 FY | |
| Apple | -3.60% | -15.5% | -33.4% | |
| Cisco Systems | -10.80% | -2.4% | -38.9% | |
| IBM | -10.4% | -14.2% | -22.1% | |
| Intel | 0.8% | -5.1% | -45.0% | |
| Microsoft | 13.10% | 19.4% | -45.4% | |
| Sector Average | -1.7% | -3.6% | -37.0% |
Technology is doing, if anything, better in 2020, than in 2015, and much better than in 2008. That’s because “tech” supports “shelter in place” initiatives such as working from home during the COVID-19 crisis.
Health Sector Avoiding The Huge Losses
A somewhat similar story may be told by the health sector, which is showing low single digit percentage losses in 2020, versus low single digit percentage gains in 2015, but avoiding the huge losses of 2008.
| Sector: Health | 2020 YTD | 2015 FY | 2008 FY | |
| Johnson&Johnson | 4.2% | -1.8% | -10.3% | |
| Merck | -8.2% | -7.0% | -47.7% | |
| Pfizer | -5.8% | 3.6% | -22.1% | |
| United Health | -1.2% | 16.4% | -44.2% | |
| Sector Average | -2.8% | 2.8% | -31.1% |
Likewise, this sector buoyed by the fact that it is expected to find a vaccine or cure, or at least diagnostics, for COVID-19.
Finally,
| Sector: Consumer | 2020 YTD | 2015 FY | 2008 FY | |
| Coca-cola | -13.2% | 1.8% | -26.2% | |
| Disney | -26.3% | 11.6% | -29.7% | |
| Home Depot | -4.1% | 26.0% | -14.6% | |
| McDonalds | -5.8% | 26.1% | 5.6% | |
| Nike | -11.7% | 30.0% | -26.2% | |
| Proctor & Gamble | -0.2% | -12.8% | -15.8% | |
| Verizon | -4.8% | -1.2% | -22.4% | |
| Walgreens Boots | -9.8% | 10.0% | -20.7% | |
| Walmart | 11.2% | -28.6% | 17.9% | |
| Sector Average | -7.1% | 7.0% | -14.7% |
This is a defensive sector whose reaction to the bear market has been relatively mild. It has apparently suffered somewhat from the COVID-19 crisis, but not to the degree that was the case in 2008, when earnings and stock prices were hammered by more traditional concerns. As a group , these stocks rose in 2015, suggesting that this was not among the afflicted sectors at the time.
Disclosure: None
By Tom Au, CFA
