The recent monthly economic releases have been as expected, horrendous; unless you focus on grocery stores, whose sales rose 26% last month. The free fall in many data sets are showing more records, all to the downside. These are March numbers where a lot of the economy was still open. April is sure to be worse. That much is known.
We have now lost 22 million jobs in four weeks, more than all of 2008. That amounts to 1,000 job losses for every Covid-related death, with more to come on both ends. Unfortunately, 60% of these private sector job losses are hitting females due to their prevalence in leisure, hospitality & government sectors, and lower exposure to the goods producing sector that has been deemed essential.
The market response to the March data reports has been a relative yawn for the major averages, albeit they are being held up by a few select industries. It is also why so much money has been thrown at the issue. Money supply is rapidly expanding with stimulus checks hitting bank accounts this week. Most of this money is going to those who spend nearly 100% of their income. A lot of this will be thrown back into the economy or used to pay daily bills.
Fiscal, monetary and philanthropic measures have exceeded most imaginations over the past few weeks. Phase IV from the US Government is coming as well. The small business loan program has already run out of money, but is expected to be increased soon. We have seen 160 central bank rate cuts this year, dropping short rates by 120bps to below 1%. Compare this to 2008 below, which was a credit recession. We are already well below those levels. Free money indeed.
The stimulus is necessary here as we have over $6T committed with $2.35T from fiscal spending and $4T from the Federal Reserve. “Don’t fight the Fed” is taking over. The markets rallied 25% – 30% off intraday lows when the bulk of the fiscal responses were initiated. Assuming we can get out of this without too many citizens stuck in the unemployment line beyond 2020, one can see the upside in equities. That money will be spent, invested and/or saved. A lot will be recirculated.
However, unintended consequence exists. Twenty-nine States have approved the extra $600 a week extended unemployment payment, which is cash on top of regular unemployment checks. JP Morgan’s# CEO, Jamie Dimon, noted upwards of 40% of those newly unemployed now make more money from the Government plans than they did working 40+ hours a week. How many of them will rush to find a new job when it actually lowers their personal income? Further, what are the long-term implications of running massive deficits? Gold prices are up 36% in the last twelve months. The last money printing exercise also produced a massive rush to the metal. It was also a great entry point for equity investors.
The recent rally has been lacking volume, and equally important, breadth. Outside of the mega cap tech stocks and a few select others, the average stock is still languishing. This is eerily similar to late February where market leadership narrowed to a few go-go growth stocks. That did not end well. For this rally to extend, we need more participation. Today’s pop is a great start with the old leaders likely to lag.
The market cap weighted S&P 500 is down 13% this year versus a drop of 23% for the equal weighted benchmark. The small cap Russell 2000 Index is down 29%. The average stock is suffering much more than most. This makes intuitive sense as the Russell 2000 has nearly 40% of its constituents showing a negative profit before the shutdown. It is also heavily weighted towards Financial, Industrial and smaller retail sectors. Diversification has actually been a detriment the past few weeks. If today’s early morning action holds, we may finally start to expand the number of stocks participating. Amazon + Microsoft alone account for over +160bps of the index returns.
Snap back rallies in bear markets are always short and strong. What happens afterwards is crucial if we want to see the end of this malaise. Although we currently expect the March 23rd lows to ultimately hold, that does not mean 10% drops won’t happen. Overall, the market may possess a saw- tooth or a W-shaped pattern with fits and starts until we get back to some semblance of normalcy. However, sector by sector will show alternative patterns such as a V, L or U-shaped recoveries.
For instance, Technology and Healthcare are most likely to experience the best pattern, that of a V-Shaped recovery. In fact, the QQQ Index (100 largest Nasdaq stocks) is basically flat on the year after bouncing nearly 30%. This makes sense from a fundamental standpoint. We have discussed all the positive trends this period is bringing for technology companies. Healthcare is another obvious one as well. Not only was there an increase in demand for cold and flu medicines, many also rushed to replenish their vitamins, headache, fever and home supplies. Drug trial news last night from Gilead’s Remdesivir showed some promise for Covid recovery. More testing and data are needed. They are not all winners as some medical, surgical and dental supply purchases are cancelled or delayed, but the sector is only down 4% after the V-shaped bounce of 33% off the lows.
One should expect more of an L-shaped recovery in the obvious areas we have noted as down and out. Energy, namely oil demand, will go by the way of coal over time. Many electric vehicles are coming out over the next several years. If battery prices follow Moore’s Law, the price of these cars will be competitive. Brick and mortar retailers who can’t get an online presence working will die quickly. JC Penney should file for bankruptcy soon. Many will suffer the same fate much sooner than pre-Covid. Smaller leisure companies may never come back. Small banks that don’t have the capital to get online banking up and running can’t survive. Restaurants with tight margins dependent upon volume aren’t going to live if they have too much debt. The stocks may have priced all of the negative news in already. The positives will take a while to be realized.
The U-Shaped group is somewhere in between, company by company. Banks that survive will not see a quick rebound in lending as the recovery and re-opening takes months, not weeks. They are unsure of how much debt is dead money right now. They will survive, some possibly thrive over time, but likely only the largest and most tech savvy. Industrial companies will be in demand at some point down the road. Capital Expenditures, new factories, expansion of facilities all take time to recover. A lot of this depends on the ability for lost workers to be retrained and find different jobs. The longer unemployment stays above 6%, the more time these companies will have trouble finding growth. Eventually, they will come back. The future also gets priced in well before the positive news comes. There is more volatility here, but potentially more profits in certain segments after the massive divergence relative to the growth sector. It is not for the faint of heart.
At the end of the day, we need a much broader based rally if one wants to put more capital confidently to work in those areas not expected to have a V-shaped recovery. Having Netflix, Amazon#, Activision# and Walmart# make new highs, with the bulk of the rest of the market still off ~25%, is not conducive to long-term success.
The 27% move in 15 days for the S&P is the strongest 15-day move since 1933. The easy money has been made in this bounce. Upside from here will be more difficult to achieve unless we re-open the economy faster than many project. It was estimated that 29 States are ready for Phase 1 of re-opening. That’s a great sign. Money printing can take us higher, but we would like to see that people are getting their jobs back as well.
Victoria Beckham turns 46 today while actress Jennifer Garner is 48.
James Vogt, 610-260-2214