We start the day with an unemployment report that spiked to 14.7% with 20.5mm jobs lost in April. Futures shrugged these numbers off as we look to open solidly higher. Clearly, optimism for successful reopenings around the world and an improving chance of beating this disease is winning the day.
Thursday’s market performance aside, the difference between the haves and have nots continues to expand, especially during this earnings-reporting season. Technology leaders, who have seen a direct increase in demand due to shutdowns, are reporting solid revenue growth even with slower GDP. Healthcare beneficiaries are showing even stronger sales than expected. Eating at home could prove to be stickier than before as we relearn how to cook and prepare meals at much cheaper costs than going to a restaurant (and better tasting if you believe my wife’s review of our sesame crusted ahi tuna).
Stock performance of winners and losers have shown dramatic divergences as well. The disparity comes from the XLK (S&P Technology Index) which is actually up over 2% this year and the Dow Jones Industrial Average, which is still down 16% is mind boggling during a 2-month global closure. The small-cap benchmark Russell 2000 is still down 23% this year while the Financial and Energy sectors are down over 30%. Diversification has been thrown out the window, for now.
There are some company specific items to contemplate as we look at the future winners from this point. Online sales are booming for WalMart#, Amazon# and eBay. When we are allowed to go to the mall, will we? Have new consumers, who were forced to learn new technologies, going to stay with online options? Surveys note that over 30% of people who recently started buying groceries online will continue to do so. That’s a huge number and a logistics nightmare for smaller companies.
Use of digital payments is also accelerating, even as we spend less. Companies have noted that more and more of the Baby Boomer generation are opening Venmo or PayPal# accounts as they purchase more online and want to be secure. Once the ease of use becomes apparent, will they keep the cash at home instead of using at the store? Many retailers are already installing contactless payment systems where you don’t need cash or credit cards. Is this adoption sticky?
On the other side of the table for investors is to determine who will continue to be in the loser camp. Certainly auto, clothing, restaurant, movie and travel related sales are not coming back in a V-shape. Stock prices reflect that scenario. However, with the massive underperformance in this bucket, there may be some opportunities. Everyone knows the negative news but no one knows the recovery trajectory.
The quicker we get to a treatment that gives more confidence we are not going to get seriously ill, the quicker this bucket can get back to normal. That is not likely in the near-term. Still, many companies at these price levels could be doubles over the next 2-3 years where confidence is higher that we can get back to regular life.
Autos could be interesting. There has been some semblance of stabilization here already. China is showing some green shoots in auto sales as they reopen. If people are moving out of the tighter confines of city living and back into the suburbs, they will need a car or two. China already noted that citizens are afraid to take the trains to work. Some will use Uber# or Lyft, but others may opt to just purchase a new or used car. The availability of 0%, 7-year financing increases a buyer’s options. Cash for clunkers has also been bandied about in the next stimulus package. This is not a mantra to buy any auto companies, which are still down ~50% from their highs, but we will have to think about the new world we live in. Supporting data points over the coming months will go a long way to see what is happening.
Not to be excluded, we still have an election coming up. The winners and losers here are also vastly different. The likelihood of a Democratic sweep has certainly expanded due to the stock market drop, job losses and questions on the coronavirus response by the administration. That’s not a prediction, just reality. Prior to this period, the economy was humming along and most companies were noting how strong things were. Incumbent Presidents, faults and all, do not lose elections if voters are happy with their jobs, income levels and a roaring bull market. That was Trump’s best re-election attribute. Most betting markets still have him as the favorite, but less so than in February.
As expected, the battle lines are being drawn in the next round of stimulus talks. Republicans want to see how the first batch of handouts help the economy. They are reluctant to bail out states that were already in trouble before the virus. Some are now clamoring for a focus on deficits. Democrats want state and local relief along with other stimulus measures aimed at their voter base. The President wants another tax cut. This package is going to take longer and will be a preview of many election campaigns.
Economic recovery or not, the next election will have many consequences. Many Republican Senate seats are available while not many Democratic seats are up. If this is a referendum against Trump, there remains the possibility for the Democrats to control all 3 branches again. It is highly unlikely they get to 60 Senate seats that allows more programs to get implemented, but a simple majority is enough for many projects to get approved. This would be the most negative scenario for equity investors.
A sweep would increase the likelihood of higher taxes and further regulation. Major sectors of the market such as big cap pharma, mega-cap technology, financials and old-world energy stocks would be at risk. That is a large portion of the S&P 500. There are benefits of course, but it would be a concerning viewpoint for equity investors. Absent a sweep, a Biden victory alone would result in less China restrictions offset by more accommodative global partnerships and lower tariffs. This is offset by whatever regulatory changes would occur at home, especially if Elizabeth Warren has a cabinet position.
Both parties want some sort of an infrastructure bill, but that has been the case for years. Settling on the details is troublesome. Another four years of Trump brings much of the same lower tax, lower regulations and increased tweeting. The China situation would come back to the fore and an uptick in trade wars is probable. That could be a near-term negative but long-term positive if some manufacturing comes back to America. Ever expanding debt will be something most Republicans will be wary of after this massive printing effort. The future looks bright, but there is a lot of work to be done.
Happy Mother’s Day Weekend to all the Moms out there!
Enrique Iglesias turns 45 today while Little House on the Prairie’s Melissa Gilbert is 56.
James Vogt, 610-260-2214