We're Back! Coronavirus Update #9
Dear Clients and Friends,
It’s time to jump back into our weekend readings after taking a few weeks off during tax season. Hmmm, what should we talk about?? (That was a sarcastic question.)
Conversation continues to be dominated by the virus, with a little bit of “how the heck is the market this high during all of this” sprinkled in. We will try to offer some insight regarding current COVID conditions, how they relate to the economy, and the recent market recovery.
First, we all knew that the virus would continue to spread in the United States following the lifting of the widespread “shelter in place” orders that kept things at bay from March until May. Clearly, this is bad. However, the resurgence of the virus remains somewhat localized to certain regions in the United States and some other countries, rather than widespread on a global scale. This is good.
In a global economy, we must consider the spread of the contagion on a global scale. Below we have graphs illustrating the change in the number of cases for the US, Italy, Spain, and the UK. These are some of the countries that have been prominent in the news lately.
As you can see, not every country is experiencing a resurgence of the virus. Frankly, we’ve done a poor job of taking this virus seriously. Other countries, where communities rallied around the restrictions, have succeeded in beating the virus back. This is not to say that we are alone. For example, Mexico and India have also failed to flatten the curve, and India is starting to have a very substantial problem. They have over 1.1 million cumulative cases and are gaining 40,000 more cases daily.
Even within the US, we see a large disparity between states:
Florida Daily New Cases:
Pennsylvania Daily New Cases:
So, it’s not all bad news, but it’s certainly not a lot of good news as we see total cases around world increasing dramatically. CNN on July 7: In the span of a week and a half, the number of coronavirus cases in the United States has doubled, yet officials are saying this is still the first wave of the pandemic. "We are still knee-deep in the first wave of this," Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said in a Facebook and Twitter livestream Monday. "I would say, this would not be considered a wave. It was a surge, or a resurgence of infections superimposed upon a baseline ... that really never got down to where we wanted to go."
How does this relate to the economy and the markets?
There are recent instances of the market moving logically; these movements were generated by massive insider buying at the end of March, massive divestitures from 401ks in March, and massive re-investment into 401ks in April and May. We’ve seen enormous amounts of money flowing into the US from foreign investors who are seeking a more stable market in light of the global pandemic. We have discussed these movements in previous readings. Thus, I’d like to point out a few obscure forces that we’ve seen at work.
This pandemic could end up causing the largest and quickest shift of wealth from small businesses to large businesses ever. Think about this: because they are a big box store, Costco can leverage their enormous space in order to provide for social distancing - which they did. They simply discontinued the sale of less popular items in order to make the necessary room for social distancing. Small shops simply can’t do this. Small shops can’t rival the logistical engine of online retailers such as Amazon. Netflix has become the primary on-screen entertainment system for many households. Small theaters are empty.
Think about how this relates to the stock market. Costco, Amazon and Netflix are all enormous publicly traded companies. Small shops, theatres, and restaurants are not. Money is flowing into large publicly traded companies and shifting away from private smaller companies. Hence, in this environment, logic supports the possibility that the stock market can outperform the economy.
Speaking of spending, lets take a look at the government stimulus. Government interventions since the beginning of the pandemic have included the Paycheck Protection Program, small business loans, enhanced unemployment benefits, and the stimulus checks. Most authorities agree that, of these interventions, the stimulus checks have been the most impactful event on the economy. All in all, the stimulus check inserted trillions of dollars into the economy, decreased the depth of jobless claims, softened the cash-flow issues of those who have become unemployed or furloughed, and gave many Americans some extra spending money. The timing of these stimulus checks was exceptional because, with literally nothing to do during the shutdown, many people either bought toys to entertain themselves or engaged in home improvement (because they couldn’t leave their homes). For example, the showroom at my motorcycle shop is completely empty. I thought that they were going to go bankrupt because of the shutdown. Quite the contrary! They sold every single vehicle they had - because, you know, what the heck else are people going to do?! I went to the frame store last week and discovered that they have a 6 week long waiting period - because everyone has finally gotten around to those little home projects they never seemed to get around to.
I’ve also been asked about home sales and mortgage applications: both have gone through the roof (pun intended). This has provided yet more stimulus to the economy. However, it is important to note that both sales and applications have likely escalated due to all time low mortgage rates. That may not matter in the short term, because money spent is money spent, and a wise refinance is a semi-permanent benefit to a homeowner. On the other hand, matters could become complicated for new homeowners and the banks that lend to them if the economy continues to deteriorate.
But here comes the elephant marching into the room: how long can this last? In some ways, spending that hasn’t completely halted has shifted, but that spending may soon dry up as well. The unemployment rate is higher than it was in 2008, the enhanced unemployment benefits are possibly ending in a few days, and consumer sentiment is pretty low and continuing to fall. If spending dries up, the market will catch up with the economy instead of the economy catching up with the market. To reiterate a phrase I used earlier “That would be bad.”
For perspective, the continued jobless claims and U6 unemployment rates are charted below. The numbers in the chart are small, but you do not need to see the numbers to get the picture.
Ok, how about some good news? I don’t want to dwell on all of our concerns. Because of the stimulus, consumer spending and retail sales have recovered strongly. In fact, retail sales are almost back to pre-COVID levels. Employment and productivity are going to be directly and materially affected by how communities handle the virus and how seriously we take social precautions.
So, what does this mean for your portfolio? The metrics are better than we thought they would be, but many are artificially inflated. Artificially inflating the economy is not necessarily a bad thing - that is what government induced economic stimulus is. But it cannot go on forever. At some point it will either stop or we will have to endure massive hyperinflation, which would be complicated by the unprecedented debt burden our government has assumed during this crisis.
(Side note: many have asked recently if I am concerned about hyperinflation in the near term. The answer is no. At present, there are enough deflationary pressures to overcompensate for the inflationary forces that have been implemented. However, we do forecast inflation to steadily rise in 2-4 years.)
Due to the tremendous number of concerns that we have (including high unemployment, uncertainty related to COVID, and uncertainty related to future stimulus), we maintain our cautionary stance and continue to be underweight in risk assets.
So, that’s a summary of what we’ve been thinking about over the last few weeks. Next week, we will send out a more traditional market risk update. For now, we wish everyone a wonderful weekend. Stay cool and hydrated, and WEAR YOUR MASK! 😊
-All of us in the home office. Cheers.
Matthew Ramer, AIF®
Principal, Financial Advisor
MOR Wealth Management, LLC
1801 Market Street, Suite 2435
Philadelphia, PA 19103
P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
601 21st Street, Suite 300
Vero Beach, FL 32960
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