Last month brought one of the strongest equity market returns in a long time, posting the best advance since 1987. Coming after we saw negative interest rates, negative oil prices and a near complete shutdown in the economy is saying something! In total, the S&P advanced 12.7% and the technology heavy NASDAQ gained 15.4%. May is starting with a whimper as the last two heavyweight tech titans gave cautionary guidance overnight. Futures are solidly in the red. A lot of good news has been priced in, maybe too much for the moment.
States continue to ramp up their reopening efforts on a daily basis. The speed of these procedures is happening faster than many expected. Golfers rejoice as our local owners are opening up courses, with restrictions. Simon Property Group, the largest mall operator in the country, is opening 49 locations this weekend. They are offering wipes and temperature checks while employees constantly disinfect common areas like escalators and door knobs. Businesses are getting employees back into the office. New studies show the virus doesn’t last very long outdoors under UV light, maybe even 20x less than indoors. There is hope we are coming out of this safely and soon.
The market has responded with vigor. The forced closures of most of the country led to a market plunge of 35% in just 23 trading days during March. Now we have seen a 35%, V-shaped move up in just 25 trading days. It is almost as if this period never happened. Obviously, the underlying components of the market tell a different story as travel, energy and most affected sectors are still down dramatically from their highs. The beneficiaries of work-from-home and FANG names are all acting great, relatively speaking. However, to think that we can return to normal life in the next few months is far-fetched.
As Jim Meyer noted, large gatherings, brick and mortar shopping (anyone want to rummage through clothing racks that have been touched by strangers?), restaurants and other areas are not coming back to pre-Covid levels this year. They may not even be back to normal by next year. However, there are many bright spots to look forward to. Let me play devil’s advocate to Jim Meyer’s cautionary posture, albeit positive long-term. The bull’s story:
• Stimulus measures are unprecedented. Unemployment benefits mean a large swath of America makes more money today than when they were working. These middle to low income earners typically spend every dollar that comes to them. With 35%+ of GDP coming in the form of stimulus, we likely over reached what will amount to two months of closures. This sets us up for a boom as we get back to something close to normal life. Sure, some will go to savings and debt, but most of this will be recycled into the economy. That’s a massive number that could keep consumer spending elevated.
• Earnings reports, especially in Big Cap Technology, are producing many winners. Microsoft has seen minimal impact to their bottom line. Facebook is already seeing ad rates back to normal. Amazon is clearly exploding, Netflix as well. Google is slightly impacted but as TV advertising moves online, they will succeed. Apple product orders are pushed out a couple months but already look solid. That’s 20% of the market still thriving.
• The aforementioned negative areas are important, but are much smaller components of GDP. Sure some restaurants, theaters and energy companies will close. Their customers don’t die though. They just spend money elsewhere. Home Depot#, Starbucks drive-thrus, supermarkets and online shopping more than pick up the slack.
• Further, consumer spending on air travel, recreational activities and restaurants make up only 12% of total spending. The combination of healthcare, food shopping and technology are more than double that rate. Guess which stocks are leading the market?
• Interest rates take time to cycle through the economy. Typically a Fed rate cut takes one year before it impacts GDP. With Fed Funds at zero and 10-year Treasuries likely to stay below 1% for a while, there remains ample opportunities for American innovation to thrive. Some projects will fail, but this is when the new disruptors are created. American ingenuity has always won out. Our freedom and creativity will create brand new products and services we will all want.
• Drug trials keep showing positive news. The media-loved Dr. Fauci noted that remdesivir will set a new standard of care for coronavirus treatment. Many other options are also showing promise. Although the fastest vaccine for any virus was approved in 4 years and there is no vaccine for any coronavirus, hope and optimism reign supreme. FDA fast tracks and billions of dollars in research will be here to help.
• As always, the stock market is a discounting vehicle. Stocks trade based on earnings expectations for 2021 and beyond. We have seen the Chinese trajectory. We know what Sweden looks like with no closures. There will be fits and starts but green shoots are popping up around the world. We will get there. This and next quarter’s earnings will be bad. Everyone accepts that.
• A year ago, if you wore a mask on an airplane there might have been some funny looks. Now social distancing measures are commonplace and to be expected. We are a cleaner society because of it. South Korea took this virus and recovered in a matter of days due to previous experiences with multiple coronavirus attacks. They have a population of 51 million and only saw 11,000 cases with 247 deaths. We will be better prepared for the next shock and will not close down.
• Typical recessions take several years to get back to normal economic levels. This slowdown was very atypical. We did not come into this with excesses like previous endings of bull markets. No housing boom, no tech bubble, no commodity bubble and no banks overly extending credit. This was self-induced. We should rebound much faster.
• Hedge funds and investors are still net bearish. That is positive in that there is ample cash on the sidelines still waiting to come back into the stock market.
• Lastly, money supply is a huge driver of economic activity. Broad money supply is 28% higher than pre-crisis levels. A one-for-one shift to the stock market, which is quite normal, leads to the S&P rising another 50% from here.
Again, we already came a long way from the depths of this bear market. Much of the easy money has been made. A nominal pullback of 5% – 10% can and should occur in due course. However, if you can look past 2020 and over the next few years, America looks to be stronger than before for a lot of companies. There are still deals out there, but fewer than in March. Now may not be the time to get overly aggressive, in spite of my notes above, unless you can take the near-term volatility. May does bring the start of some negative seasonalities.
Seeing the S&P only down 9% after we closed the entire world is a bit confusing. Patience should bring more bargains. Hold onto world-class winners. Make sure you are back in-line with your asset allocation parameters. It is now May, smell the roses. We are getting closer to seeing our friends and family in person!
Tim McGraw turns 53 today.
James Vogt, 610-260-2214