Stocks fell sharply in late trading yesterday for no obvious reason. If the market had gone up 450 points, I could have attributed the rise to optimism about the reopening of our economy. If it went down 450 points, as it did, I could suggest the cause was concern that reopening would spread the virus. But the reality is probably that a large institution/computer trader entered a sell order which precipitated a drop. Momentum investors, or other computer algorithms, kicked in and the day ended with a thud.
If it weren’t for the virus, I would normally suggest in mid-May that we were at the point in the quarter where there is little economic or corporate news. That means one-off events have an enlarged impact. Maybe investors are worried about a Fed action or a Trump tweet. But today all the attention is on Covid-19. There aren’t any answers. We are entering unknown territory.
It is said that Republicans stand for less government and more free enterprise. Democrats feel government can do many more things better or safer than the private sectors. Therefore, they are more likely to interject rules and regulations to enforce behavior. We see that as states start to reopen. Republican governors are more likely to open quicker with fewer restrictions. The big states with Democratic governors largely remain in quarantine status except for essential services. Public health officials issue lots of warnings and guidance based on “data”. But there isn’t a lot of history here. So, skeptics cry garbage in, garbage out. We know, for instance, that the number of reported infected people is still rising. But is that because more are being tested or more are being infected? Hospital admissions in most states are flattening or falling, although levels are still elevated.
I am not a scientist and have no better idea than anyone else. But here are the facts as I see them.
1. All states will reopen to some extent between now and late June. The cautious ones will be under too much pressure to wait any longer. As a result, economic activity will increase.
2. As more and more people get out in the world, even with the obvious safeguards or masks, social distancing, etc., more people will get infected.
3. Released from captivity, some will race out and do anything allowed, while others will remain cautious and stay away from public places.
4. It will take several weeks for data to reflect changes in behavior. While it is hoped that longer days, warmer temperatures, and less indoor group confinement may allow the spread of Covid-19 to abate, we will have to wait for the data. The real risk probably rises in the fall when days get shorter, we move back inside, schools restart, and flu season begins.
Until then we can all speculate on rates of recovery. We will also have to live through an ongoing series of unintended consequences. Just look back over the last two months. Yes, it is just two months since we all hunkered down. First, there was no toilet paper or Lysol spray. Now there is a run on meat. When we go back to work, who is going to take care of the kids? Will those laid off or furloughed, when recalled, choose to go back to work, given that many are making more money in a short period of time than they were making when the world stopped? What won’t reopen at all? Every day there is another announced bankruptcy. Can airlines survive until traffic rebuilds, at least to the point where they are cash flow breakeven? What are vacations in 2020 going to look like? Will office buildings become occupied by zombies as people find working at home more efficient than working at the office? Who is going to cover the additional expenses and losses of revenue for virtually every municipality in the United States? Can the Federal government print trillions of new dollars to solve all the pending problems without any long-term economic impact?
These are just the questions that come to mind quickly. By their very nature, unintended consequences and shortages surprise us. Most aren’t easily predictable. What is the future for museums, art galleries, or parking lots?
The answers will become much more apparent over the summer as the world reopens and facts replace speculation. Some of the answers will be favorable. Some won’t. Covid-19 won’t disappear. But our abilities to handle it or live within its presence will change. More testing (no, Mr. President, there isn’t adequate testing capability yet), new treatments, and just plain old experience will help. Nothing precludes a fall surge, but nothing guarantees it either.
Without a surge that will be severe enough to cause repeat lockdowns (more than likely local rather than national), we should see a healthy pace of recovery. But with a significant number of people nervous enough to restrict how they live, a complete recovery will take time. GDP will recover a lot faster than employment. That is the nature of every post-recession period. Capital spending will remain weak. The capacity excesses that existed before are going to be even larger tomorrow. In particular, those that process raw materials, from steel mills to oil refineries, will have a slow recovery. Leisure will obviously have to wait well past the date of universal vaccines to recover. That could be late 2021 or even later.
The pandemic will lead to permanent change. The number of active movie theatres will decline. Producers are going to find ways to make as much money and go direct to consumers, at least in part. Office buildings are destined to have lots of vacancies as the way we work and communicate changes forever. I am not suggesting we suddenly all work at home. Nothing replaces the interaction of human contact. But if your daily commute is 2 hours and you are going to be sitting alone in an office without meetings on a particular day (or days), why not telecommute?
Some predictions are to be questioned. I accept there is much too much retail space, but I don’t believe in the demise of retail. The traditional department store may fade away, but all your big online retailers, starting with Amazon, are going to want a physical presence. Therefore, as Forever 21 and J Crew disappear from malls, Amazon, Peloton, Tommy John, and Casper will appear. Gyms, spas and restaurants will replace anchors like JC Penney. Malls will offer more experiences. In other words, retailing will change, not disappear. What will disappear are those retail centers that don’t adapt. Since there is too much retail space, by definition, there will be strip centers and malls that don’t survive.
Technology will continue to change everything. Even the hottest tech names are morphing. Look at Uber’s apparent interest in GrubHub. UberEats has been thriving. As people get used to home delivery, more will use it. On the other hand, in a world where health concerns remain elevated, will the move toward ride sharing continue at the same pace as before Covid-19? Undoubtedly Uber will be viewed as safer than mass transit. There are lots of unanswered questions.
As investors, when the world changes we have to change too. I have mentioned this many times. One thing I haven’t stressed is the attractiveness of a stable and growing dividend at a time when bonds barely yield 1%. If you believe rates will stay low for a long time, stocks that pay nice dividends become increasingly attractive. Granted they are more volatile, but if you own good companies and don’t have to sell the underlying shares, collecting a handsome and growing dividend gets more attractive as rates go lower.
Today, Robert Pattinson is 34. Stephen Colbert is 56. Dennis Rodman is 59. Stevie Wonder turns 70. I would love to be the fly on the wall at the birthday bash for these four.
James M. Meyer, CFA 610-260-2220