Jason Blackwell, CFA, CAIA®
Chief Investment Strategist
April 27, 2020
Oil was in the spotlight this week, and the news here was not positive. Oil futures contracts for May delivery settled in negative territory for the first time in history as storage capacity quickly fills up. The self-induced economic coma has dramatically reduced energy demand while oil producers have been slow to cut production. As a result, oil inventories have risen causing the industry to run out of places to store it. The prices charged to store oil has reached a level that has required oil traders to pay for people to take the oil contracts off their hands! Longer-term contract prices were more stable, however, as speculators and industry participants expect higher prices several months from now.
In a way, this is almost a perfect metaphor for the broader investment markets. Today’s crisis is troubling and full of uncertainty, but intuitively, we know that the economy will make it through.
We have intimated about our expectations that the economic impact of COVID-19 will be steep but relatively brief. That thesis is largely conditional upon three developments:
We have long held that markets would rebound before the economy does. We have seen plenty of negative datapoints over the past few weeks: 26 million jobless claims, sharp drops in consumer sentiment, and dismal earnings forecasts, to name a few. The market has taken these in stride and has maintained its focus on the eventual recovery. This forward-looking perspective has pushed the S&P 500 up more than 25%.
From here, we remain cautiously optimistic that our economy will rebound as reopening gains traction. We are very aware, however, that the markets now share our optimism and prices are near fair value. In a recent commentary, we likened the crisis to a hurricane and shared our uncertainty on whether we were in the eye of the storm or if it had, in fact, passed. Our latest thinking is that this might not be a storm so much as an earthquake. There’s a good possibility that we are through the worst of it, but we must remain prepared for aftershocks.