Stocks fell sharply for the second day in a row, reversing recent trends. Investors who enjoyed the two week rally now have to revert to defense once again. While several states are at the cusp of reopening their economies, the news front is decidedly mixed. That will certainly add to volatility over the next several weeks. Early earnings have been inconclusive. March offered a hint to what lies ahead. Almost all managements have backed away from offering future guidance, only adding to uncertainty.
Today, the biggest unknown can be divided into two parts. When will the economy reopen, and how fast will it accelerate? There are some who will answer the questions saying soon and quickly. Others will say it will reopen slowly over a period of months and take years to fully recover. No one can prove they are more correct than anyone else. We are in unchartered waters. All agree that the arrival of a vaccine with a high degree of reliability would be the definitive game changer, vastly reducing health related fears. Some are hopeful that a vaccine could progress to the point where primary caregivers can receive injections as part of a Phase III trial by Q4. Again, that is a hope, maybe even an expectation of many. But it is far from a certainty. As for general availability, estimates range from next winter to late 2021. That’s a wide range.
All this plays against the titanic battle we all face between public health needs to separate and isolate as much as possible, and an increasing urgency to restart businesses that might never restart if forced to stay shut much longer. Sporadic protests today will become more forceful the longer the pressure persists to stay locked in place. We all know the sooner we are allowed to interact more frequently, the greater the risk of infection. But if we stay indoors much longer, for many there won’t be a job to return to. I don’t pretend to have the answers other than to say a balance is needed. Logically, it will be arrived at by trial and error.
As we approach the reopening, we are hearing more dire predictions from public health authorities pressing to stay quarantined for longer. Several harken back to the Spanish flu of 1918-1919 that saw three waves, with the return of the virus in the fall being the most devastating. But they can only speculate whether this time will mimic that, or whether some less adverse alternative may be the true reality.
In the economy, we are already beginning to see the unintended or less obvious consequences of extensive shutdowns. Look at what is happening to the oil market. Demand is down 30%. You can’t shut down supply by that much in 30 days. As a consequence, inventories are exploding and there isn’t any more storage space for new production. That means not only will new drilling stop, but existing production will have to be shut in. That sounds easy but the process of stopping and restarting is expensive and far from trivial.
Look at hospitals. You would think they are overwhelmed with activity judging from what you see every night on the news. The truth is only part of every hospital is overwhelmed, that part dealing with Covid-19 patients. But there is no elective surgery. No colonoscopies. Only critical chemotherapy. No outpatient services. That knee replacement? Maybe in a few months, if you can get back on the schedule. They are hemorrhaging dollars.
Small businesses have furloughed millions. Unemployment claims total 20 million in just three weeks and millions more are in line to apply. 50% of hotels are closed. Many will never reopen. The same is true for restaurants. Or small retail stores. Every day closed is another set of businesses that won’t see the light of day again.
For weeks, we have been underestimating both the impact and duration of the virus on the economy. Pro golf is about to reopen in June, but without spectators. That may be true for all professional sports until the end of the year or longer. At one point it was hoped that Disney’s theme parks would open in June. Now the hope is Christmas. And that is far from certain. Closed movie theatres mean this summer’s big features are being moved back to later dates. Closed studios mean new product isn’t being produced.
This all sounds pretty bleak. And it is. But there are two offsetting positives. First, the virus won’t last forever. Once it’s gone, life will normalize. Second, all the money the Fed and other central banks are shoving into the banking system will help businesses in the interim while also supporting asset prices.
Clearly, there are haves and have nots in this Covid-19 world. We all know by now which companies are in which category. But let me point out a paradox for all to ponder. Pioneer Natural Resources# is a large independent oil driller working mostly in the Permian Basin in Texas. Oil prices are collapsing, as noted earlier. They are clearly a poster child for the have-nots. On the other hand, take Netflix. Who isn’t watching Netflix today? After the close last night, the company reported first quarter results that blew past the most optimistic estimates. They only had great things to say about the future. So why was Pioneer up $3 per share yesterday while Netflix barely moved in early afterhours trading? Could it be that markets know more than most analysts? Could it be that markets already discounted $5 oil or surging Netflix volume? When bad companies go up on bad news, that’s a good sign. When great news can’t move a stock higher, maybe some sort of correction lies ahead. Valuation always matters.
You can’t win in the stock market only reading today’s headlines. You need to anticipate tomorrow’s news. It’s like throwing the pass to where the receiver is going, not where he is at the moment. Perhaps one reason markets remain well off their lows is that Armageddon isn’t likely to happen. Most companies will survive the virus. The most dire predictions get the big headlines. We hear every night of overwhelmed hospitals and anyone with name recognition who died. But that is only part of the story.
We don’t know the consequences of reopening if we don’t try. And there is not a better time to try than when school is out, the number of new cases is starting to fall, and the weather begins to get warmer. Maybe we will have to hibernate again before the virus runs its course. I have no idea. But I know that staying locked up for months is going to lead to dire economic consequences that could overwhelm the public health risks. So instead of screaming about what Georgia, South Carolina, and Tennessee are doing, let’s watch and learn. Maybe there is a balance that works better than what we are doing today. Maybe that’s one reason stocks haven’t set new lows for four weeks.
Today, Jack Nicholson is 83.
James M. Meyer, CFA 610-260-2220