Stocks fell last week after three straight weeks of gains. Persistent Covid-19 eruptions added fuel to the decline. But the signature move last week was stepped up profit taking among the high profile tech companies. Netflix and Microsoft# both reported fine earnings, and yet their stocks tumbled, bringing most of the other tech names down with them. Intel had a particularly weak report, punctuating the fact that competitive forces are working against any tech name unable to move with the speed necessary to stay on top.
The virus, of course, remains the market’s number one fear, the one item that can impact the economy more than anything. Of course, while its impact is direct (more virus equals less discretionary spending), what is critical today is the effect it has on Congress and the Federal Reserve. Republicans in Congress today plan to roll out their version of a fourth relief bill. It is likely to cost a bit over $1 trillion, well under 50% of what the Democrats in the House already passed a few weeks ago. Note that there is over $1 trillion unspent to date from prior relief measures.
While details weren’t fully available as this note was written, the Republican bill is expected to offer additional one-time payments of $1,200 to qualifying individuals, offer legal liability relief to businesses, and extend moratoriums that prevent lenders from foreclosing or evicting tenants in many cases. Tomorrow and Wednesday, the Federal Reserve will hold a two-day meeting to discuss future strategy. While there won’t be any rate changes this time around, attention will focus on how much the Fed plans to funnel into the economy going forward via bond purchases, how long the program will continue, and under what conditions it will accelerate or decelerate monetary easing. Fed spokesmen to date have expressed a lot of pessimism regarding the near term economic outlook. Some have noted that the most important economic tool of the moment is convincing Americans to adhere to public health protocols. Obviously, that is happening more successfully in the Northeast than in the South. But whatever the behavior patterns may be, it is clear that the infection rates as we move toward August are quite a bit higher than any government or public health official wanted to see a month or two ago. Moreover, virus headcounts around the globe continue to rise. Places where the virus seemed under good control, like Germany, are now seeing a new wave.
Throughout this pandemic, there have been a lot of comparisons to the Spanish H1N1 flu outbreak that began in 1918. Early surges in the spring of 1918 equate to our same experience this spring. Over the summer, the virus calmed down, more than it has during the Covid-19 epidemic. But then a huge surge in the fall led to tens of millions of deaths worldwide. Two smaller resurgences in the winters of 1919 and 1920 brought the flu epidemic to an end.
The surges in Arizona, Florida, Texas and Southern California have served to remind everyone of a surge in the fall when kids go back to school, temperatures move diners from the curb to indoors, and flu season complicates matters. States all over the country are grappling with how to reopen schools. There is no one solution. Even when local governments and parents appear ready to send kids to schools, teachers and other workers push back on safety concerns. How schools reopen is likely to remain a work in progress for a few more months.
With that said, recent data is hopeful. Arizona, one of the first Sunbelt states to see a spike, now appears to be over the hump with new infection rates flattening or even falling. Texas appears next in line to be followed by California and Florida. That, of course, depends on whether governors push the necessary public health measures, and what is allowed to stay open or close. It seems rather obvious that masks, social distancing, and the necessity to limit large gatherings would help. While no one anywhere is holding large meetings and even President Trump now acknowledges that the Republican convention needs to be modified, kids still congregate, and mask wearing is spotty at best.
The end result is that a huge spike a la 1918 is likely to be avoided by a combination of natural behavior and government action. The summer surges across the South did bring reactions. We can argue whether they were tough enough, but they seem to have slowed the rate of spread. Thus, disease levels remain elevated, and one could presume that another uptick coinciding with school reopenings might occur. Under that scenario, there won’t be a repeat of mass quarantining. For most of us, life will go on but with some adjustments. However, there will continue to be major economic sectors that will struggle mightily. Whether airline passenger loadings continue to move up slowly or not, business travel will remain almost non-existent. Leisure travelers will look for vacation alternatives that avoid flying, unless Americans can be assured flying is as safe as driving, a high hurdle. Restaurants will struggle as well, particularly when colder weather limits outdoor seating. And that means there will be a slow drip of closures if restauranteurs can’t see a return to complete normality in sight. While there is excitement about vaccines and therapeutics being in place to limit the impact by year end, that remains a very optimistic assumption. In the spring, President Trump suggested the ability to test 5 million Americans per day was just around the corner. Today, we test far fewer than 1 million per day, many have to wait in long lines to be tested, and results can take up to a week or more. Vaccinating 300 million people in the U.S. and 7+ billion worldwide isn’t going to happen soon enough.
The bottom line, economically, is that the easy part of the V-shaped recovery may be behind us. Last week, we saw a rise in weekly unemployment claims for the first time since March. We will know next Friday whether the unemployment rate continues to fall or not. It probably will for July but there has been a spate of recent layoff announcements, particularly from airlines, suggesting that moving the number back into single digits is going to be hard.
The stock market for months has been celebrating a surge in activity as our nation reopens state by state. But now, the easy part is done. Sports have restarted, but without fans. TV ratings will tell us soon whether anyone is watching. Retail stores and malls have reopened but crowds are sparse. Gyms are starting to reopen, but membership cancellations far exceed new signups. Concert venues remain closed. If schools cannot fully reopen with in-person classes, the abilities of many to return to work will be hampered. GDP will grow in Q3 and Q4 barring another huge surge. But, while there aren’t clear signs of a virus surge coming like it did in 1918, there are also few indications that the infection rate is going to decline any time soon. If what you see today is what you can expect to see for many months ahead, a return to true normal is at least a year away. The Fed can, and probably will, remain an investor’s best friend in the interim, keeping rates anchored near record low levels. 10-year Treasuries this morning are yielding 0.57%. It is hard to find any high-quality instrument that yields 1% maturing in under 5 years. That forces anyone needing income to take more risk. It also requires governments to take on more debt. Furthermore, as the Fed, which now owns over 10% of total investment grade debt issued in the U.S., continues to add to its balance sheet, liquidity in credit markets will become of more concern. What we experienced in the repo market last fall will inevitably happen again.
Last week, market rotation and good vaccine news helped to give a bit of a bounce to those stocks in sectors of the economy most impacted by Covid-19. But given the outlook suggesting a much slower rate of recovery from here, I wonder whether those gains will be sustained. As for the growth leaders, they showed a bit of fatigue last week. We will see this week how other leaders like Apple# and Amazon react to earnings. August and September can be volatile times for stocks, and I expect more volatility this year. We are in a transition period. The start of school season. The rotation of virus hot spots. An apparent inability so far to reopen bars and indoor seating for restaurants safely. An election that offers stark contrasts. Volatility in the commodity markets. A weaker dollar. Markets can handle transitions well, but they do so in a rather choppy fashion. This isn’t a time to chase momentum. Rather, it is time to build shopping lists and hope you catch a few gems during any slide.
Today, Jordan Spieth is 27. Alex Rodriguez turns 45.
James M. Meyer, CFA 610-260-2220