Following the collapse of Bear Stearns in March 2008, Oaktree Capital Management Chairman Howard Marks wrote in a memo that mark-to-market accounting was the “accelerant” to the financial crisis. The basis of Mr. Marks’ argument was that Sarbanes-Oxley imposed mark-to-market accounting rules, which increased the volatility of bank portfolios. Marks noted that Citibank would not have survived a previous crisis if mark-to-market accounting rules were in place during the 1980s. We read Marks’ memo as saying that, without changes to the accounting rules, banks, stocks, and the US economy would be under pressure.
When the financial crisis accelerated in the Fall of 2008, Government leaders regarded the mark-to-market accounting changes as meaningless. Yet, Bank of America and Citigroup received new capital injections from the US government in January 2009, months after Lehman collapsed. Facing a crisis that showed no signs of abating, the Fed Chairman Ben Bernanke forced FASB to relax mark-to-market accounting rules. The first sign of this pressure was March 6, 2009, just days before the market bottomed. It’s impossible to know how much this rule change contributed to the market bottoming, with Fed Chair Bernanke going all in at the same time. But the Fed’s commitment to backstop the economy coupled with the significant change in accounting rules gave investors better certainty over the outlook.
Today’s equivalent of mark-to-market accounting is when the economy can begin to re-open. This is why the possibility of New York’s caseload peaking is so important, as it is a sign that the US is likely to peak two weeks from now. This does not mean that the all clear is immediate, nor does it mean that the US economy will quickly recover. But the light at the end of the tunnel is starting to emerge.
While the S&P was off by about -2% last week, selling pressure was less intense (lowest weekly volume since late-February), and we’ve come across a few green shoots worth noting…
- The VIX has continued to decline, and is now sub-50 (the high was 85 on 3/18);
- Despite the awful headlines, European stocks (even Italy) have quietly outperformed since the 3/16 low (perhaps a few weeks ahead on the virus curve);
- The spread between BB and BBB corporates has started to recede over the last two weeks, while non-financial commercial paper spreads attempt to stabilize as well.
These are hardly groundbreaking events, but they do mark subtle shifts at the margin against a plethora of apocalyptic headlines and terrible economic data. 20-day moving averages have remained resistance for the major indices and mark an important hurdle for the longs. The relative performance of Banks, Hotels, Airlines, Cruises, and Casinos remains very weak (the Banks are the most troubling on this list), but Energy stocks have actually separated from the pack of late.
Small numbers make for easy comps, but Crude is up roughly +50% from its 3/30 low and is well off last night’s Russia/Saudi/OPEC low. From December ’08 to March of ’09, crude saw 3 rallies in excess of +45% and 2 declines of -31% and -35% – but ultimately it bottomed several months before the S&P did.
At the risk of repetitiveness, Healthcare stocks continue to emerge as leaders in our work. Historically, leadership has tended to persist for several years following past relative breakouts for HC vs. the S&P. The theme holds true down the cap scale as well, with small-cap Biotech also breaking to multi-year relative price highs.
Our portfolio rebalancing into areas where saw opportunity is paying off. Oil, Energy, Preferred’s and REIT’s have all performed very well. We also recently added to our exposure in healthcare with investments into Pfizer and XLV. Please call or email us at any time with any questions or concerns you may have.
Source: Strategas
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
Latest News
Federal Reserve to boost small business lending efforts
The Federal Reserve says it will support the government's $349 billion small business lending program, which had a rocky start Friday
Market Extra: This chart shows why BlackRock, other major...
The Federal Reserve already sits atop the near $20 trillion pile of global central bank support for world financial markets, but it is also massively expanding its $4.5 trillion balance s...
