by Bryan Perry

March 31, 2020

Last week’s ferocious three-day rally that had the S&P 500 gaining 18% off the Monday low of 2,187 was telling in a number of ways – and not in others. What it did not foretell was whether the absolute low has been put in, because there is no telling when the worst of COVID-19 will be over – at least not yet.

If you listen to President Trump, we’ll be holding family barbecues with our closest 100 friends and neighbors by mid-May. If you listen to the healthcare community, however, it’s a different story.

The same can be said for the investment world. There are those who are absolutely certain the economy and the stock market are going to roar back to new all-time highs by the fourth quarter, with Treasury Secretary Steve Mnuchin being the head cheerleader. At the other end of the spectrum we hear from those that are pronouncing that this week-long bull market is over, and every rally should be sold with vigor.

Nobody really knows, so we have to look at last week’s data points to ascertain whether another retest is warranted, leading to a quintessential double-bottom, a higher-low chart pattern, or, God forbid, we take out last Monday’s lows because the coronavirus creates a wider and deeper impact than anyone imagined.

There is already a stunning 39% drop in the number of hourly employees working in the 10 days ending March 20, and this number will increase. Thankfully, paychecks will soon go out to those furloughed.

Percentage Change In Number

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

How this plays out is being modeled nine ways to Sunday, none of which have any empirical evidence to help forecast the future, because the U.S. is not managing the problem like China or South Korea did. There have been no full lockdowns where mass transportation has been outlawed – as could have been done. So now, cities like Atlanta, Dallas, Chicago, Detroit, and Philadelphia are seeing caseloads spike.

For those who want to put a short-term spin on the situation, I’d just say that we as a nation have a lot more wood to chop before we get too optimistic about the virus being conquered in the near-term, or the stock market recouping all its losses simply because the Fed, Treasury, and Congress have flooded the market with liquidity. What last week’s rally did foretell is that the rally was largely driven by short covering on the fiscal stimulus news with a lot of low-quality stocks performing best. The rally also showed what sector is “too big to fail,” as the Fed bought investment grade corporate bonds.

Last week, I highlighted the sharp decline in shares of the most widely traded corporate bond ETF, iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and, true to form, the Fed came to the rescue and shares of LQD rallied over 16%. Now that we know the high-grade corporate bond market is backed by the full faith and credit of the U.S., the 3.42% current yield on LQD looks pretty attractive.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

That was huge for restoring market confidence, and I pointed this out by stating, “Stocks will follow the trend of the debt markets and if there is new life in the top-tier corporate, mortgage, convertible, and preferred asset classes, then and only then, will a sustainable rally materialize.” The preferred, convertible, and high-yield markets rallied sharply off their capitulation lows of March 23 – if they are the final lows.

At this point, investors should be making a short list of those sectors and stocks that have the highest probability of re-establishing a sustained recovery. I emphasize “sustained” as the operating word of choice here. Unless one is trading the volatility, there is elevated risk in buying “great stocks” that are lower at a time when the market is fully absent of both economic and corporate guidance, and Wall Street research has been reduced to seasoned analysts just making a S.W.A.G. (Scientific Wild Ass Guess).

What we saw last week was a big vote cast for utilities, and while industrial demand for power is certainly going to be down for a quarter or two, utility balance sheets are solid, dividend payout ratios range from 50% to 75%, there is no Forex exposure, and yields are some of the juiciest for blue-chip defensive stocks.

Sector Performance

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

All confidence is out the window when investors bail out of power companies, so I was very surprised to see shares of the Utilities Select Sector SPDR ETF (XLU) trade below its long-term moving average that comes into play at $55. In what I can only see as a full and forced liquidation by leveraged fund managers to meet margin calls, shares of XLU plunged to a low of $43.44 a week ago Monday (-38.9%), followed by a move back up to close the week at $55.68, recovering above its key three-year weekly moving average.

S&P500 Utilities Sector SPDR

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This was also true for the healthcare sector, but not so for the consumer staples and real estate sectors, both of which closed the week below their weekly moving averages. These four sectors are where dividends are fattest and businesses most recession proof, save for some sub-sectors of real estate.

Even though the most crowded market call on Wall Street is for a retest of the lows, I think another pull back is warranted, but probably not as steep as most are calling for. I believe the S&P will trade in a wide range of 2,200 to 2,650, where overhead resistance exists. A break above 2,650 will invite further upside.

For income investors seeking safety and yield, consider using any selling pressure to buy electric utilities. They are essential, financially sound, domestic, and offer as much upside potential as anything available.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
The Fed Added $1 Trillion in March Alone

Sector Spotlight by Jason Bodner
Sentiment Still Stinks, but a Bottom Has Formed

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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