The S&P 500 rose to a new all-time high in a mixed trading session. Once again, it was the tech stocks that led the advance led by Amazon and Alphabet#. But yields fell and the stocks of companies most adversely affected by Covid-19 were in retreat as the economy showed some signs of weakness now that supplemental unemployment benefits have expired along with the PPP loan program.
Congress is now in recess, although Nancy Pelosi is going to bring the House back this weekend to vote on supplemental funding for the Post Office. But with the Democrats in convention this week and the Republicans to follow next week, substantive legislation will have to wait until late August, if then.
Some Democrats are now petitioning Speaker Pelosi to pass interim funding, including extending unemployment relief, with more to follow in January. I am not a political scientist, but this sounds like a path to getting enough done in the interim such that incumbents can go back to campaigning without being brutalized. If nothing is done, voters will blame incumbents. Party affiliation won’t matter. For that reason alone, expect some action either late in August or early in September. That doesn’t mean money will flow immediately; Washington only acts so fast. But it does mean money will flow before the election.
Elsewhere, one of the big stories is the Post Office and the issue of mail-in balloting. Far be it for me to weigh in on the merits or demerits of mail-in ballots. But I will offer the following thought. The post office delivers, on average, about 450-500 million pieces of mail each day. The total number of ballots this November should be about 125 million. Not all will be done by mail and not all will be mailed on any one day. There is no reason whatsoever, that the Post Office cannot handle the mail-in ballots. That doesn’t mean some won’t get lost or misplaced. State officials can dictate not only when ballots must be postmarked (obviously on or before Election Day) but also when they must be received in order to be counted. Any state that allows votes to be received more than three days after Election Day is only asking for problems. Some, maybe many, will require ballots to be received by Election Day. Whatever the rules are, voters will fully understand them and vote accordingly, either in person or by mail. There is no reason to expect fraud. Mail-in ballots have been used for years without controversy. That doesn’t mean whoever loses this year won’t cry foul. But the proof of burden will be high. This is simply a media firestorm. The loser will have to not only prove fraud but prove the fraud swung the election. Let’s move on.
Economically, the keys for the next 30 days are government funding, or lack thereof, and the reopening of schools. The first will get done because there are about 500 incumbents running for reelection and they don’t want to do so facing the wrath of voters. The latter is a work in progress. We are already seeing some colleges reverse course after the urge to party exceeded the desire to be medically safe. Whether colleges go in-class or virtual, however, isn’t economically crucial. Parents don’t have to stay home to tutor their college aged kids. The key is K-12. All over the country, we see a wide range of options implemented. Hopefully most work, but the odds favor a lot of adjustments in the weeks ahead. How they work out, and how many parents are forced to stay home will weigh on the pace of recovery.
Recently, meaning over the past week, the stocks of companies that would benefit from a rapid recovery have faltered. This includes all the obvious candidates including airlines, banks, hotels, REITs, and retailers on non-essential goods. That suggests a rising bit of pessimism regarding the pace of recovery. While that can turn on a dime, as it has often in recent months, the fact that these stocks are below recovery highs clearly is an expression of skepticism. This week a few of the tech and related Covid-19 beneficiaries have shot to new high ground, but valuations are reaching nosebleed levels. There are several now selling at 20x or more times revenues. I have learned over the years that 10x revenues is unsustainable. Maybe this time is different. But I have heard that a lot over the years and rarely is it true. Riding on Tesla’s heels, we have seen a spate of electrically powered truck stocks go public via SPACs in recent weeks. The only guarantee I can make is that most will fail.
That isn’t to say the market has to fall apart. Rather, over time, as the pandemic fades, a lot of traditional companies will recover. Banks aren’t going away. Despite all the hoopla about electric vehicles, collectively they are still less than 2% of the market. People will eat out once again, go to theme parks, and take vacations. At the other more speculative extreme, there is always silliness that needs to get corrected. It will in due course. Valuation always matters. But yesterday’s companies operating by yesterday’s rules are not going to succeed in the future. The rule book has changed and companies that want to grow need to change. A robust online presence is necessary. Digital cash is replacing paper cash. Streaming isn’t going away. Nor is video conferencing. Great companies adapt to change. They are agile and move quickly. We may build new homes the same way we did 50 years ago, but today’s new home has room for a Peloton and a home office. What’s a dining room? New homes are smart. They are wired for tomorrow’s world. That’s why they are attractive and sell at a premium.
As investors, we have to ignore the noise (e.g. election mail fraud threats) and concentrate on what is economically meaningful. Pick a company you like. Ask yourself how has it changed/adapted over the past six months. If it hasn’t changed, think if it is still a leadership company. Wal-Mart# announced a great quarter yesterday seeded by major steps it took three years ago. If it didn’t change then, it would look more like Macy’s today, closing stores and struggling to find its footing.
Today, Matthew Perry is 51. Bill Clinton turns 74.
James M. Meyer, CFA 610-260-2220