A Cheat Sheet: Hedgeye’s Current Market Call - 04.27.2020 social distancing cartoon

Wall Street’s “V-shaped recovery” narrative is a tragic comedy of epic proportions.

Just consider these (mind-blowing) stats from last week:

  • Industrial Production: Worst print since 1919
  • Retail Sales: Missed Wall Street expectations with 3x the downside.
  • Continuing Jobless Claims: Just hit 22,800,000
  • Consumer Price Index: Worst sequential decline since December 2008 

So let’s stop speculating about the shape of the recovery and take a big step back…

The U.S. economic outlook is really bad.

There were significant issues facing U.S. economy pre-virus.

  • The U.S. economy had been slowing since 3Q 2018.
  • This was happening with corporate debt to GDP hitting all-time highs.
  • Peak leverage, slowing economic growth and rising unit labor costs were hurting corporate profitability pre-virus.
  • 36% of Russell 2000 companies had negative pre-tax income pre-virus.
  • 27% of US companies with greater than $10 billion had negative YoY EPS Growth.

We don’t believe Wall Street’s “V-shaped recovery” narrative because of the pre-conditions that existed in the slowing U.S. economy (with peak leverage and falling profitability) pre-virus. All these preconditions make for a precarious cocktail alongside the depressionary, COVID-19 demand shock that will hit the U.S. economy over the next couple quarters.

Q: What about Fed liquidity?
A: What about it?

We don’t think the Fed and Treasury can fix a solvency problem by flooding the U.S. economy with liquidity. Consider the following:

  • According to Womply, more than half of U.S. household have no emergency savings.
  • According to AARP, 55% of Small Businesses would not survive a 3-month shutdown.

Furthermore, there’s never been an instance where Initial Claims increased by >100K and Consumption did not slow in the corresponding quarter… then slow further over the subsequent quarters. The cumulative 8-week total now stands at 36.5M with more than a quarter of would-be American workers without a job or employed at significantly reduced hours.

So what does this mean for financial markets? History suggests this is the first chapter of a much longer story. Bear markets don’t end abruptly at the first sign of bailout. They typically end after months of fits and starts. The average bear market lasts 20 months. The median bear market lasts 18 months.

When hard pressed to talk about the “shape” of a recovery, Hedgeye CEO Keith McCullough has continued to say, “Investors will likely be chopped up by a series of Ws.”