Stocks moved up sharply once again yesterday despite bad news related to Covid-19. More on that in a moment. On Monday, there was a mini-flash crash within the high flying tech sector. In a matter of hours, several stocks that had gone almost parabolic in recent weeks, like Tesla, fell by as much as 20%. The same stocks waivered yesterday morning, but when they stabilized the entire market regained its footing and took off upward into the close. I will comment on that as well this morning.
But let me start with the virus. As new cases surge in the south, we once again see evening news highlights of exhausted emergency room nurses and listen to tales of rising death tolls. While those who feel the virus fears are overstated with the number of deaths continuing to remain well below April peaks, one only has to take a look at Miami or Houston where death rates are now double the spring highs and rising rapidly. If one doesn’t respect Covid-19, it will kill. Governors who ignored the warning signs are now backtracking. While Florida still doesn’t mandate masks, other states are doing so. And they are closing bars and restaurants. California threatens another lockdown.
Look at the data. It doesn’t lie. Politicians can spin the numbers, but they speak clearly for themselves. On Monday, Florida lost 132 souls. On Monday, Spain, Italy, Germany, Canada and Sweden combined saw 39 people perish from the virus. All these countries have young millennials who love to party. Italians love to hug. The Swedes never locked down to begin with. It isn’t the air that is different in Florida, it’s the respect, or lack thereof, people have for the virus.
Death changes that. Ask New Yorkers. In the spring, New York state was losing over 700 people per day. On Monday, no one in New York City died from Covid-19 for the first time since the pandemic began. Walk the streets of New York today. Everyone wears a mask. They avoid indoor dining. Stores are open but sparsely populated. Businesses have reopened but many still work from home. Yes, Broadway is still closed, and you can’t go to a concert or a Yankees game. But life is normalizing. New York was traumatized in the spring. They don’t want to go back there. In the spring, Floridians were asking what all the fuss was about. Now they are learning. They will behave better going forward.
And that, indeed, is the message of the market. Gradually, the outliers will respect the virus and life will go on. To be sure, adjustments will be necessary. Philadelphia has canceled large events through February. Probably a smart move. In the Spanish Flu epidemic of 1918-1919, it was Philadelphia that held a huge parade leading to the nation’s biggest spike in infections. School reopenings will be responsive to the disease. There will be some districts in hard hit areas like LA that go totally virtual. Most will take steps to adapt in ways to moderate the risks, going partial in-class and partial virtual. Adjustments will have to be made on the fly. But we will get through it. For the next 12 months or so, GDP will be muted by some of these adjustments. It will hit certain sectors hard. We already know that and it is reflected in the stock prices of companies in the industries most impacted. To be sure, some won’t make it to the other side when the virus comes to an end.
As for vaccines and cures that will shorten the time span to normality, don’t get too optimistic. We might see early signs of Phase III trials before the end of the summer, but that doesn’t mean a vaccine is going to be approved and available in mass numbers before the middle of next year. There are steps that can be taken to shorten some processes, but only time can tell us how effective a vaccine might be, how long the benefits will last, and what co-morbidity risks lurk. The FDA remembers Thalidomide babies and won’t be rushed to judgement. Efficacy is important. Even if the FDA did rush approval, millions of Americans will wait to take it until evidence indicates both safety and efficacy. Normality will have to wait. Again, markets understand this. The risks are priced in.
In short, much of the rest of the world has learned how to deal with the virus. In the U.S. some lax states will start to fall into line soon. We already see evidence, for instance, of a flattening of the curve in Arizona. Better testing and tracing would be a big help, but it appears that isn’t going to happen without a major push from Washington. That seems unlikely at the moment. Maybe if testing and tracing lapses become a campaign issue soon that could change. But in the end, no one wants to get sick. Once all Americans get respect for the virus, they will adapt, and threats will subside. The so-called second wave is likely a reflection of the obvious. As we move indoors more in the fall and winter, spread gets easier. We have to be more careful. The spread now in the South may reflect the rush out of summer heat into the comfort of air-conditioned space.
One must remember that stock markets have no conscience. They reflect facts. GDP and earnings will remain below peak levels until the virus is behind us. Whether that is 6 months or two years is an open question. But as we adapt and get smarter, we climb back up the economic curve. That’s the market’s overall message.
But there isn’t one market. The virus has split it distinctly into the haves and have-nots. The haves have soared while the have-nots are struggling to tread water. Some won’t survive. Every week, a new retailer seems to enter Chapter 11. Airlines teeter on the brink. Banks have no idea yet how steep their loan losses will be. Gym memberships are being canceled. Movie theatres remain closed. No bars and no indoor dining in most places.
Investors react to this in obvious ways. They sell the have-nots and buy the haves. The valuation gaps between the two widen. As the haves soar, more money flows in their direction. The valuation gap widens further. Soon the winners are just a few dozen names. They soar even more. They go parabolic.
We have all seen this movie before. If you are old enough to remember those Saturday morning movie serials where every episode ends with the train going over the cliff and the hero jumping out in the nick of time (which we didn’t know for sure until the following week!), we all believe we can do the same in the stock market. We’ll sell just as the winners start to fall.
Except that isn’t the way it happens. The fall is too fast and our reactions too slow. Before we can say “Tesla” its stock is down 20% in two hours. Monday was a warning. Most of the stocks hit Monday afternoon stabilized yesterday. One of these days they won’t. For the past three years we have learned that bear market moves are sudden, painful and vicious. The only way to avoid them is to sell before they happen. That doesn’t mean you sell all your Tesla or whatever name you want to substitute. But if you think these stocks can never go down again, you are wrong. They can, they will, and when they do, they will fall in a flash. Not to zero, but to a number that will hurt if you hold on too long. You have to look at valuation. You can’t follow the analysts that keep raising price targets every day in order to justify staying bullish. You have to use your own mind. Is Tesla (and again I am just using Tesla as an example) worth more than GM, Ford, Volkswagen and Toyota combined? It was a $1000 stock at the end of June. Is it worth 70% more today? Maybe you take some money off the table. As Jim Cramer says, bulls make money, bears make money and pigs get slaughtered. All stocks have a value. When everyone wants to buy the same stock, it’s probably overvalued, and all the others are probably cheap. Be careful in this market. Pay attention to value and stay diversified.
Today Forest Whitaker is 59. Arianna Huffington turns 70.
James M. Meyer, CFA 610-260-2220