We have seen nearly 400,000 Covid-19 deaths and 6.6 million cases globally. A large portion of the world was shut down for months. Over $10 trillion in stimulus is being implemented. Many businesses, small and large, are closed forever. Currently, the number of flights is 90% below year ago levels. Interest rates are back to zero or negative in much of the developed world. Oil prices went negative and are already back toward $40/barrel. A large portion of Australia was on fire. A heinous death tied to law enforcement leads to peaceful protests, followed by looting, riots and further senseless murders. Even more small businesses are destroyed. Military personnel are used to keep peace, not just in China. An upcoming election features the two oldest candidates on record at 73 and 77 years of age. The S&P 500 drops 35%. The S&P 500 rises 42%. It has been an interesting decade to say the least, and we’re only 5 months in!
Even with all the hectic news and rightful concerns for safety of our loved ones in areas under pressure, stock markets around the world keep running higher. The S&P is only down 3%, year to date. A 50% rally has brought Germany’s index back to only a 6% drop for 2020. The Hong Kong benchmark is down just 7%. Economic data, global trade disruption, forced closures and record setting unemployment metrics should bring any stock market down. Typically, it would take years to get back to normal.
A globally coordinated money printing machine can keep the market action far away from what is happening economically. Sooner or later though, economic data has to normalize. We are seeing some green shoots that point to a better future:
- Jobs data crushed estimates this week. Many expected an unemployment rate of 20% with another 8 million unemployed in today’s report. The May nonfarm payrolls report showed a GAIN of 2.5 million employed and an unemployment rate of only 13.3%. Astonishing numbers compared to what was expected. Not great, but beating what many were hoping for at the end of 2020, not in May.
- The Cheesecake Factory has only opened a third of their stores but noted they are already up to 75% capacity in those that are up and running. That’s much higher than many expected.
- 30-year mortgages are getting done below 3%.
- Today, mortgage applications are higher than any point this year and the 60%+ increase in applications over the past seven weeks is the largest move since 1994. Consumers are getting cash from multiple sources with Government checks being sent out as well. Most of this has gone to savings but is fuel for spending in the future.
- This 40% move is the largest 50-day advance in the S&P, ever. Of the previous seven best advances, all of them showed further gains over the coming year. The average return was another 17%. Admittedly, a small sample size but positive nonetheless.
- China was the first to close and the first to open. We are hopeful that they are a roadmap for Europe and the U.S. as auto sales in China’s latest report are back to pre-Covid levels. Many other areas are showing the same momentum.
- Corporate spreads (the yield above that of a U.S. Treasury) have collapsed since the Fed’s bond buying program was announced. The kicker, the Fed hasn’t bought one corporate bond so far.
- There are more new small businesses being created today than pre-Covid. American ingenuity leads to new companies, products and services we don’t even know we want yet.
- American Airlines just announced flight schedules for July which are a lot more than expected. The stock was up 40% yesterday and is up another 25% pre-market today! They are only 40% of last year’s numbers but trending in the right direction. Flights that are going on domestically have been quite full. People want to get out of their homes.
- Germany and the bulk of Europe for that matter, have announced surprisingly strong stimulus measures. There are 6 European countries with stimuli relative to GDP that are greater than what the US is doing. This is not the same Europe we’re accustomed to. No one is worried about inflation today. German 30 year Bunds are finally offering a positive yield now.
- Asia is participating with many markets showing their best weekly gains in 9 years. A globally aligned bull market is much more powerful than one led by a handful of mega-cap tech leaders.
That brings us to the summer months. Online schooling is over soon and family vacations start. These are normally the worst performing months for stock markets. After the recent rally, we’re extremely overbought. A correction here to remove some of the excesses would be welcome news. A momentum rally that doesn’t pause usually ends with a larger decline down the road. It is not supposed to be this easy to make money (or get back to even).
The demonstrations across the country will also bring us a live case study on the ability for Covid to spread in warmer months with longer days of sun. There are still many restrictions in large cities with respect to dining, going to indoor events or playing sports. That has been thrown out the window. I see some mask wearing but the protests brought a lot of hugging, hand holding and closeness. That hasn’t happened in months. We may see a brief rise in the number of positive cases. If so, does that halt the rally and increase fears for a second wave? If cases don’t rise, are we going to increase the speed of reopening? It could be a determining factor in the next 10% move in the stock market.
In summary, momentum is strong and fueled by money printing efforts. Data is slowly getting better. Some industries are stronger than expected after reopening. The average stock is still down double digits even though the market cap weighted index is only down 2%. Some opportunities exist in the land of those heavily impacted by the virus. Timelines are being compressed at the moment but conviction in a 2nd wave or unemployment getting back to sub 5% is debatable. FOMO (Fear of Missing Out) is hitting investors with cash on the sidelines causing the rally to become extended.
Another warm weekend is upon us. We hope everyone has their power back on from the nasty East Coast Storms!
Mark Wahlberg is 48 and musician Kenny G is 63. For those with children or grandchildren parked in front of a TV playing video games during quarantine, they may know Professional Gamer, Ninja, who turns 28 today and has made millions playing Fortnite.
James Vogt, 610-260-2214