Stocks closed slightly higher Friday in a seesaw session, but still finished lower for the week. While earlier in the week it might have seemed that a serious correction was beginning, by week’s end the bulls appeared back in control.
Clearly the economic data has been all bad, in some cases worse than expected. Friday saw reports of double digit declines in both retail sales and industrial production in April. But of course we all know by now that April was simply a horrendous month, one that will go down in history as the worst ever from an economic standpoint.
However, markets look ahead, and almost all states are beginning to open up. The pace of openings has more to do with the political philosophies of the various governors than what Covid-19 statistics might suggest. Conservative governors with more of a laissez-faire attitude are opening quicker. But we are only talking a matter of weeks before every state allows a wider berth. Time will tell the impact of reopening on the pace of new infections.
Scientists make a hypothesis and then let the facts determine a conclusion. Politicians and the media, more often than not, start with a conclusion and either bend the facts or often make them up to support what they claim. What we do know is that, economically, reopening will mean improvement. Well over 30 million people have filed unemployment claims over the past six weeks. Now some are going back to work. More will do so over the coming weeks and months. But not all.
It will take many months, maybe even years, before everyone regains comfort flying or even staying in a hotel room. Restaurants will struggle to fill seats. Movie theatres will resemble ghost towns. Sports venues are beginning to reopen but the seats are filled with cardboard cutouts, not people. While leisure and entertainment are only a moderate fraction of overall GDP, the impact of sharply lower usage will continue to impact our economy for a long time. Not only will it impact those industries directly, but the ripple effects will be far ranging.
Perhaps one market segment to look at now to judge the optimism, suggesting a rather quick initial recovery, is the oil industry. Not very long ago, a seller of crude oil had to pay for someone to take delivery. While negative prices only lasted a few hours, barrel prices in the single digits suggested a world way oversupplied. But, as often happens, imbalances get corrected a lot sooner than anticipated. In the case of oil, production has dropped quickly, and more storage has been found. Now oil flirts with $30 or even a bit higher. That isn’t a price level that will stimulate new drilling activity, but it is high enough to stop any more shut-ins of current production. Storage remains extremely tight, but if the world is restarting, consumption is going to crank up. Those glorious commutes with absolutely no traffic slowdowns will come to an end. Cooped up families will want to find some sort of vacation spot to visit.
Everything from here forward is a grand experiment. That includes the path toward vaccines and therapies for the virus. There is no question that resources aiming for a solution are massive, increasing the odds for success. While politicians are promising to solve all problems by year end, scientists remain skeptical. Even if the right vaccine candidate can be found this summer, going through Phase III trials and scaling up production are going to take many months. Politicians overhope. Scientists are natural skeptics. The truth probably lies somewhere in between, probably on the same path we have been assuming all along, one that suggests broad vaccine availability sometime next year.
Economically, it is convenient to simply discard 2020. I buy that. But the rate of improvement toward year end is important. We still have little idea what it will take for restaurants or concert hall venues to survive until conditions allow a return to full capacity. At what rate can airlines operate at a cash flow breakeven level? When can they get there? We still have no answers.
For the stock market, there are three classes of companies. Those in serious economic jeopardy are barely hanging on. Most are flirting with their March lows once again. These include banks, airlines, department stores, some industrials, hotels, shopping mall owners, etc. They are easy to identify. Some will survive. All will have extended pain. To own these stocks requires a strong stomach, a lot of patience, and an ability to move quickly if you are wrong.
The next group are those who actually reap some benefit from changes in the way we live and work today. Think of streaming, video conferencing, cloud computing, cleanliness, eating more at home, and online shopping. Many of these “winners” are obvious. Their stocks are market leaders today. But not all winners are as obvious. Some are fairly prosaic like manufacturers of cardboard boxes, liquor producers, and owners of distribution centers.
Finally, there are all those in the middle. Here you have to separate those that have been fast adapters to change, and those waiting for normality to return. Obviously, the former are bound to be more successful than the latter. One certainty of this pandemic is that life as we knew it four months ago will never be the same. Our work habits will change. That doesn’t mean everyone will work from home. But it does mean many will spend less time in the office going forward. It will impact where we live, how we move from place to place, how we entertain ourselves, how we travel, even how we communicate. If there is one word that has entered everyone’s lexicon over the past four months, it is Zoom. Whether Zoom can defend itself against Microsoft, Google, Facebook, Apple and others over time is still an unanswered question. But video get togethers are here to stay.
Covid-19 has made us adapt. It has made us more efficient. It has also taught us who to believe, who to listen to. The afternoon virus updates from the President and governors are fading as we all figure out for ourselves how we are going to reintegrate into a new, more open world. Clearly Wall Street believes we will do it rather successfully. Stocks are now within 10% of where they were when the pandemic began. Yes, we will have to wear masks, keep apart, and use a lot of soap and sanitizer. If the rate of new infections rises, we will have to pull back some. If it stays contained during the summer, the healthier among us will take more risks. The overly cautious regulations currently governing our first baby steps will disappear quickly.
It would be nice if we had the testing capacity to isolate local eruptions. That will probably develop over time. One imperative will be to get schools reopened by fall. It will happen using split sessions, and probably an integration of both video and on-site teaching. The simple fact is that we have an election in November. Without open schools, parents can’t go back to work. That will be death for incumbents. Therefore, there will be a solution. That goes for colleges as well. Football stadiums may not be packed every Saturday, but robust education will return. Because it has to.
It will still take 2-3 years for the economic damage to be completely repaired. What we don’t know is how much more government aid is needed, where the unintended consequences will surface, and the future course of interest rates and inflation. These are some of the unknowns that will dictate where stocks are headed. While the late rally last week and early gains in the futures market this morning show optimism, it is hard to get too optimistic. Stocks aren’t cheap and there are plenty of unknowns. Early vaccine candidates may not be as efficacious as hoped for, and it will take time to inoculate everyone. The old saw, sell in May and go away, means that a choppy four or five months lies ahead. That may be a decent conclusion this time around.
Today, Tina Fey is 50. Cheltenham native Reggie Jackson turns 74.
James M. Meyer, CFA 610-260-2220