But one cannot sit back and look without that constant reminder, “don’t fight the Fed”. The Federal Reserve is now committed to buying individual bonds. Buying ETF shares and holding them doesn’t seem as good a long-term solution as buying individual bonds and holding them to maturity. Ultimately, ETF shares would have to either be held forever or sold. Bonds themselves have a natural defined life. Of course, when an 800-pound gorilla decides it wants to buy or sell, everyone should either get out of the way or do their own buying or selling before the gorilla arrives. Buying means prices go higher, not just for the asset class in question, in this case corporate bonds, but all classes of financial assets, including equities.
Does that mean, without Fed intervention, stocks would be lower today? Almost assuredly. But (a) we can’t answer the question in the absolute, and (b) it doesn’t really matter. We deal with the facts at hand, and the facts say the Fed is adding to its balance sheet at a $3-5 trillion annual rate. Therefore, don’t fight the Fed. As long as it is buying at that pace, there is a floor under the value of financial assets. That doesn’t mean news can’t be so bad that stocks fall anyway. If Covid-19 were to get so bad this fall that the economy had to totally shut down, stocks would fall and fall hard. But right now, even with a surge, the general consensus is that the economy won’t completely shut down again.
This morning I want to talk about acceleration. Pandemics are an accelerant to trends already in place. Some are obvious, some less so. Let’s explore.
Send in the clouds – OK, I know the song was about clowns, but it sounds like a catchy way to start. Cloud computing has been gaining momentum for years. Once the cloud got to be robust, thanks to the likes of Amazon and Microsoft#, computer and internet users have gravitated in that direction. Why maintain your own hardware plant with all the attendant security and backup concerns? Why limit your capacity? Why not take advantage of sharing or having 24/7 access from anywhere? Isn’t unlimited capacity a plus? Not only has the cloud become a way of life, but thanks to the Pandemic, all its advantages not only became more obvious, they became essential. Every IT manager is asking himself what additional applications can I move to the cloud and how fast can I move them?
Videoconferencing – How many of you knew how to use Zoom last Christmas? Videoconferencing has been around for years. But Zoom has made it easier and, for many of us, free. Once quarantined, that is how we communicated. Once the doors open, we would all prefer to get together in person. But now when your relatives far away have a birthday, the whole family can have a Zoom call. In business, videoconferencing will eliminate the need for a lot of one-on-one visits. Person-to-person will always have its advantages and planes will still be full of salespeople. But even then, a large meeting is more likely to have Zoom participants. Technology accelerated the use of videoconferencing.
Streaming – Netflix has been the way to go for years. But quarantines and closed movie theatres have accelerated the trend. Now we have new names like Hulu and Peacock. They were coming anyway. Soon, many new movies are destined to bypass the movie theatres. Many theatres won’t even reopen. Those that do live a threatened existence. I don’t think movie theatres will disappear. But there will be fewer and fewer of them. The movie experience is going to have to change as well. Theatres were upgrading before the pandemic. That will accelerate after.
Cash – When was the last time you went to an ATM machine? Cash is dirty. When you buy online, you don’t use cash. Cash won’t disappear, but it will become used less often. Does that mean fewer bank branches and fewer ATMs going forward? Probably.
Buy Online – We all have been doing that more and more for years. But the story doesn’t end there. Buy online and have the item delivered by Amazon is fine, but when everyone buys online, that promise of 1-2-day shipping seems to fall apart. How about buy online, pick up at the store? Ask Home Depot or Best Buy. They love that! How about going into a store and buying everything you need (a flat-screen TV, a hanging bracket, a soundbar, HDMI cables and a warranty package), completing the sale without going to a checkout counter, and having the stuff ready for you at a pickup location by the time you get to your car. The point is good businesses are changing. During the pandemic, 90% of McDonald’s sales went through the drive-thru window versus a bit over 60% before. After, assuming McDonald’s can keep the line moving, that number won’t return to 60%. Say goodbye to the need for playgrounds to pull families in. Say goodbye to restaurants without drive-thru service. Buying online and having the purchases delivered applies to food as well. But the art of delivering a meal isn’t rocket science. The world is full of companies trying with various degrees of success. Some will win, most will die.
Let’s spread out – Social distancing is a phrase we rarely used before Covid-19. Today, hugging, touching, and being within 6 feet of each other is a no-no. Millennials were already gravitating to the suburbs for more space and better education opportunities. They will move there a lot faster now. That not only changes the housing market, it changes the car market, and it helps the D-I-Y chains. Maybe even baseball will survive despite its best efforts to kill itself. But it also means fewer people going to bars every night.
Work-at-home – When the pandemic is over, most of us will go back to the office. But not all. And for those of us that do, working from home is a real flexible alternative.
There are other trends likely to accelerate. Self-check-in at hotels. Self-check out at big retail stores. Kiosks at fast-food restaurants. Take-out food even with family and fine dining restaurants.
Some trends that were in place have hit roadblocks as pandemics force change.
Uber/Lyft – Ride sharing isn’t so comfortable today. OK, it beats the subway, but it isn’t quite as safe as walking or using one’s own car. The task ahead for these companies is to standardize a high quality of service and convince users that ride sharing is a safe alternative, using every version of the word safe.
WeWorks – Workspace sharing will still have its place, but the idea of packing a lot of people into a small space with the perk of a free beer Friday afternoon is quickly losing its appeal. WeWorks faltered before Covid-19 arrived. To survive it will require major changes.
Airbnb – In a world with virus in the air, would I rather stay in an unknown home or a hotel room of a chain I trust? That, of course, assumes you are willing to do either. Once again, the burden is on Airbnb to adapt. Go to its site and it says all the right words. But is the experience up to the verbiage on the website? That will be key.
Most of the trends I mentioned are for the better. But there are three of major concern.
The big get bigger. Not only does size, capital access, and good management make a difference, but when you can get the government to allow you to stay open as an “essential” business while your competition is closed, wow! Just ask Wal-Mart#, Target, Home Depot#, CVS#, etc. We see this in the stock market. The big companies are public. The little guys getting killed are small businesses. That is one reason the stock market’s recovery has baffled many. But those 20 million Americans without jobs are the customers of the big boys. Without them, gaining share won’t be enough. This is likely to slow the rate of recovery unless the government can enable most of those out of work to return to good paying jobs.
Income inequality – That gap had been closing before Covid-19. But it has widened enormously since. The vast majority of those laid off lived from paycheck to paycheck. Their savings, in many cases, are evaporating. Don’t misread yesterday’s good May sales figures. Many of us are catching up after 3 months of confinement. That won’t continue forever. The savings rate is elevated because so many have to start again. The recent demonstrations have roots in race relations, but the quarantine and rising income inequality are clear accelerants.
The right to vote – In Wisconsin, Georgia and Pennsylvania we have learned that governments can’t react to change as well as well-run businesses. Covid-19 means more use of mail-in ballots. Threats of foreign hacking has forced changes and new voting machines. President Trump has already spoken out on the potential misuse of mail-in ballots. If the U.S. stands for free and fair elections, our governments, Federal, state and local, need to quickly get their collective acts together and ensure that process. This primary season has been a disaster and it has taken place amid extremely light voter turnout. The post office has to be part of the solution. Even companies like Amazon, Fedex#, and UPS have had problems handling surges. Mail-in ballots must be received before Election Day and voters need to know their ballots have been received. New machines and scanners have to be adequately tested before use. All this requires money at all levels. If our governments don’t take this problem seriously, our election this fall could be a huge mess. And don’t think the stock market won’t react to the mess should it occur. It is avoidable but only if governments at all levels react. Here in PA we still don’t know who won contested elections on June 2. Only the lopsided races. That isn’t the way the system is supposed to work.
Today, rapper Kendrick Lamar is 33. Venus Williams is 40. Newt Gingrich and Barry Manilow both turn 77.
James M. Meyer, CFA 610-260-2220