After a mixed holiday-abbreviated session on Thursday, President Trump last night signed the budget and Covid-19 relief bills he criticized last week as disgraceful. While his protests may have been another attempt at fermenting chaos, financial markets never took the bait, holding firm as last week came to a close. While the signing eliminates an uncertainty, at least in theory, markets never assumed nothing would get done. As a consequence, the signing shouldn’t ignite much of a rally. Markets have already discounted a relief bill before year end.
If there is any real good news to digest, it would be a flattening out of the curve of new daily Covid-19 cases. While flattening doesn’t mean the surge is over, the fact is that the parabolic rise in cases we have seen for weeks seems to be subsiding and may be evidence that the worst of the surge is near. Hospitalizations, and unfortunately weekly deaths, will continue to rise for at least the next few weeks. But with the worst at hand, it is likely the worst of the restrictions is also near. Reopenings may not happen for a few weeks, but they could begin to occur before January is over. By reopenings, I don’t mean a return to normal. But I do mean some school districts will return to some form of live learning. Retail stores will continue to operate, and some restaurants could start to reopen, if only to limited capacity within a month or so. Given the increasing availability of vaccines, the current surge is likely to be the worst of this pandemic. I don’t know if late winter or late spring will be the time where a return to normality begins, but if the right direction is in sight, the stock market is likely to continue to move higher.
As we all know, the pandemic has clearly changed the way we live. According to MasterCard, retail sales grew by 2.4% from November 1 to December 24. Over the same span, online sales grew by 47%. That number may be a bit inflated if not properly adjusted for returns. But the point is obvious. The trend in the direction of online sales has been going on for years. Covid-19 merely accelerated the change. Will there be some reversion to in store sales once the pandemic passes? That is obvious. But at the same time, we have all come to learn the advantages and disadvantages of online ordering. On balance, I suspect the advantages will win out and the trend in that direction will continue indefinitely, although not at 2020’s pace.
Change requires one to adapt. That goes for both people and business. If you are stuck at home, you can binge watch TV or read a book that has been gathering dust. But you can also be proactive and creative. I suspect hundreds of thousands of new businesses have emerged worldwide over the past 12 months, some destined to become tomorrow’s major new businesses.
The same is true in the business world. If you were in the right arena, such as big data or cloud computing, the pandemic accelerated the adoption of your products or services. But if your customer base was restaurants, you had to shift quickly, perhaps marketing to another business sector or focusing on the parts of the restaurant business segment still operating, like takeout or outdoor dining. Sales of propane tanks and outdoor heaters have spiked. Obviously, not every business could adapt. There isn’t a way to reconfigure a cruise ship that makes any sense.
The world is always changing, prodded by demographics and technology. That is why none of the original Dow Industrial components are still in the average. Over time most companies become obsolete and either die or merge. Even when they don’t die, they become less relevant. Look at IBM# today, for instance. Companies in certain industries do retain staying power. As long as soap or toilet paper aren’t replaced, there will be a place for Procter & Gamble#. But that doesn’t mean P&G doesn’t have to innovate to stay ahead. Tide Pods are a perfect example.
Among other things accelerated by Covid-19 and the subsequent responses were stock prices. Low interest rates elevated P/E ratios, leading to higher prices. But markets never behave evenly. At first, once markets got their sea legs again in the spring, the technology leaders, the so-called FANG stocks, led the market. But by late summer, they reached a valuation wall. At the same time, markets were behaving as they always do. In bull markets that means a rotation from skepticism to reality to optimism, and finally, euphoria. Thanks to the largesse of central banks and Congress, there is excess money sloshing around and that is feeding euphoria. So far, the euphoria is reasonably contained. But it is spreading particularly toward new issues, SPACs, and alternatives like bitcoin.
While many will opine why bitcoin will go higher or lower, there is no one on the planet who can calculate its intrinsic value. Because there isn’t any. Yes, it serves a purpose in rogue nations without a real currency, and it is used in the underworld to launder money. But that doesn’t make it substantive. Nor does it help to calculate value. Some suggest bitcoin will replace gold as the ultimate store of value. Therefore, the value of bitcoin should ultimately equal the value of the world’s gold supply. Really, has gold been hacked lately? What about all the other derivative cryptocurrencies? The reality is that bitcoin is worth what someone else is willing to pay for it. Will there be digital currencies in the future? Probably. But aren’t we moving in that direction without the need for crypto? We learned in the pandemic that we have very little need for cash today. Some Scandinavian countries are seriously exploring going cashless in the near future. Bitcoin won’t be the foundation of that move. Rather bitcoin is simply evidence of the euphoria invading markets today, just as it was 3 years ago when it first approached a value of $2,000.
For the rest of this week, trading should be light. There are no news events of note. There may be some residual tax selling, but most of that has already happened. Next week, Congress returns, the Georgia runoffs take place, and we will see a lot of economic data to confirm the current state of the economy. The relief package won’t help until later in January. Thus, December should be OK, but not outstanding. But markets look ahead. The vaccines are rolling out at about the rate most private forecasters predicted or about half the rate the Federal government promised. I would think everyone’s first thought Thursday night as the clock strikes midnight is goodbye and good riddance to 2020. We will look to 2021 with optimism. As the year progresses, markets will tell us whether that optimism is justified. The first big moment will come Wednesday morning when the market learns who controls the Senate.
Today, John Legend is 42. Gayle King and Denzel Washington are both celebrating their 66th birthdays today.
James M. Meyer, CFA 610-260-2220