Some downside volatility has finally crept back into the market with mostly down days this week followed by a cyclical rebound yesterday. Futures are down again today as China trade war rhetoric heats up.
The fiscal and monetary stimulus can only go so far (and that’s a lot) before economic data takes over. The slowness in certain states allowing businesses to reopen and the reluctance of a large number of consumers staying in hibernation is wreaking havoc on investors’ V-shaped recovery hopes. It doesn’t matter that XYZ business is allowed to do curbside pickup if they have to start paying employees again and only a handful of customers show up. Dr. Fauci’s testimony did not help sentiment. Fed Chair Powell did not lift any spirits either. Economic reports in some pockets were worse than expected. This all adds up to profit taking after a 30%+ jump off the lows.
We have discussed the upcoming choppiness expected for the next few months. Some businesses will open back up only to realize they cannot survive the new norm. A lot of businesses have already closed their doors forever. Many more will come. No amount of money printing will make a 70-year old health-conscious person sit in a coffee shop or go to a small clothing store. That is today’s reality. Trillions of dollars can prop up a stock market and help out a lot of people but it does not create end-market demand. This will take time.
That means the recovery will have fits and starts. Sports leagues are planning to play without fans. That’s great for the cable providers but bad for municipalities’ tax receipts, stadium owners, parking lots and employees of each. The economics change dramatically for everyone involved, though there is not much concern about a billionaire feeding his family. The ripple effect is what the market is concerned about. This will get back to normal but instead of one month, it could be six to twelve or more.
California Universities are already forcing online classes next year. How many campus employees are never going back and what skills do they have for the new world? Child summer school programs are being cancelled left and right. What happens when a business opens but employees don’t have access to childcare?
We know office REIT’s will have to get used to lower occupancy rates. There are billions of investment dollars in these vehicles that have investors who rely on their high income streams. When these inevitably get cut, how does spending respond?
Restaurants operate on slim margins. Does it matter that they are allowed to now open if they have to adhere to strict guidelines? To have their PPP loan forgiven, they have to nearly hire all of their employees back. That could come to one table per waiter and cook. The economics are better if they stay closed. This could be 3+ months. There are a lot of examples like this to be concerned about.
That is not to say we can’t come out of this pandemic stronger. However, the extremely strong advance in the stock market does not coincide with what is happening on the ground. This will take longer than some expect. Over the long run, there are still great values. Near-term, the volatility is here to stay until we get some treatment options that relieve the stress imposed upon the consumer who is scared to go near anyone. A market led by a handful of stocks is not a healthy one. The next advance needs to include the relative losers that are still down ~30%+ from their highs.
Jim Meyer mentioned the idea of using world class companies that pay a dividend as a viable strategy for income investors. When long term rates are sub 1%, it becomes impossible for many retirees to live off their fixed income portfolio alone. They will be forced up the risk curve. This leaves an interesting conversation as to what option to choose. Dividend aristocrats, those who have raised their dividends for at least 25 straight years, are a good place to start. These are viable entities that have seen multiple recessions and still were able to give investors an increase in payments.
Here is a basket with their current yields: 3M Company# 4.5%, Abbvie 5.3%, AT&T# 7.5%, Caterpillar# 4.1%, Chevron# 5.9%, Coca Cola# 3.8%, Emerson# 3.8%, Pepsico# 3.1%, T Rowe Price 3.4% and Sysco 3.9%. That’s a diversified group of 10 stocks with an average yield of 4.5% that has grown every year for several decades. That is mighty impressive when 5-year investment grade corporate bonds are not even 2%. If one can stomach market gyrations in the near-term, a basket like this could prove helpful if you are dependent on income for spending.
Let’s end with a chart from RBC:
We are back in the bull market range from the 2009 lows. Some back and forth action over the summer months as we slowly reopen is probable at this point. Right or wrong, the biggest states have the most cases and are moving at a snail’s pace. It is no longer about making sure there are enough hospital beds, it has shifted to the need to find a cure. That is not going to help the economy or make the picture above any prettier.
One can debate the merits of staying home versus developing herd immunity with those that are young and healthy. But bankrupting businesses and forcing millions of people to the unemployment line has its own negative health consequences. Wisconsin’s Supreme Court even had to get involved, nullifying the Governor’s stay at home orders. California basically shutting down for 3 more months has the feel of politics over common sense.
The lows of March are likely to still hold, but the longer it takes to get back to normal, the higher probability that more small businesses are shuttered forever and the economy stays in a rut. The next few months will be critical as to whether the upper and lower bounds of this current trading range hold.
Football stars Emmitt Smith (as an Eagles fan, BOOOO) and Ray Lewis turn 51 and 45, respectively, today.
James Vogt, 610-260-2214