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All states are now in the process of opening and the markets appear to be anticipating smooth sailing ahead despite not having sufficient testing, a therapeutic solution, and a vaccine.
We remain concerned about three things: a resurgence in the pandemic in the fall, escalating tensions with China, and the upcoming Presidential election. Having said that, the U.S economy clearly has bottomed; the Fed has more arrows in their quiver to support the economy without going to negative rates and the government is ready, willing, and able to pass as many support programs as needed to get us to the other side.
The tug of war continues between huge liquidity creation against the impact of the virus on the economy, issues with China, and the election. The net effect of all this is that the markets will stay within a trading range until we have more definitive answers on each of the major issues facing us.
This week we heard several companies, including Visa (NYSE:V), Mastercard (NYSE:MA), Shopify (NYSE:SHOP), Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL), announce that ‘work at home’ for all employees will last at least through year-end. Mark Zuckerberg of Facebook went as far as to say that his company will reconfigure operations around dispersed structure with over 50% of his employees always working at home.
In addition, Walmart’s (NYSE:WMT) CEO John Furner commented on their earning’s call last week that the change in consumer buying behavior that has shifted online will be permanent. Same thoughts were made on the Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) conference calls. We are confident that all of this is just the tip of the iceberg supporting our long-term investment thesis in the still emerging new normal.
By now you must know that we believe that optimistic caution is smarter than blatant courage in today’s market. Discretion is the order of the day. We are avoiding those companies that have rallied big time whose earnings may not fully recovered until 2022 at the earliest and whose very existent is at risk.
We listened to Fed Chairman Powell and Treasury Secretary Mnuchin when they jointly participated at an online Congressional hearing last week. Mnuchin presented an optimistic view of the recovery while Powell was much more sanguine. The Fed Chairman puts health above the economy while the Treasury Secretary is focused on boosting the economy minimizing health concerns.
Powell suggested additional spending by Washington could be needed to prevent long term damage from high unemployment and waves of bankruptcies. The CBO released its updated forecast last Tuesday projecting “a gradual and incomplete recovery” over the next 18 months. Mnuchin said Thursday that there is a strong likelihood that more stimulus will be passed over the next few months as the economy struggles to recover. We concur!
Our outlook remains that the economic recovery will be an elongated U based on the following assumptions: new therapeutics will be here over the summer; there are no large outbreaks in Fall; there will be a vaccine within 18 months; the Fed will provide all the liquidity needed; and the government will pass additional fiscal stimulus programs. All bets are off if there is a large outbreak of the coronavirus in the fall or renewal of trade conflicts with China.
The U.S government has gone all in supporting medical research for vaccines along with capability to produce billions of vials for the world. Just look at what the government has given Moderna (NASDAQ:MRNA), AstraZeneca (NYSE:AZN), and others! After listening to Dr. Fauci and these companies last week along with J & J (NYSE:JNJ) and others, we are optimistic that a vaccine will be found sooner than later. We are just as confident that there will be several therapeutics on the market before the end of the summer, Finally, it is clear physicians have learned best practices to help patients who get the virus. All good!
We are very concerned that tensions with China are rising at just the wrong time over their handling of the coronavirus; their relationship with the WHO; their move to increase control over Hong Kong; the listing of their companies on U.S exchanges without proper accounting; restricting Huawei’s access to U.S technology; movements in the South China Sea; control over key health care products and rare minerals; and trade. While all are these issues are credible, this is not the time to increase uncertainty in the financial markets until our economy is on firmer footing. Clearly the Chinese President was demonstrating to the world at the National People’s Congress in Beijing last week that he is still in control and would do what he felt was needed to maintain China’s rights and influence in the global economy. The government removed for the first time in decades any economic forecasts instead focusing on job creation and investments. Xi also confirmed that China will abide by its trade deal with the United States.
The political race for the Presidency has already begun impacting the financial markets as investors weigh and compare the views of Trump and Biden and handicap the election for the Presidency and Congress. We listened to Joe Biden on CNBC last week and was disappointed with many of his comments, especially on tax policy. We need to get to the other side before even considering raising taxes on both individuals and corporations. Clearly, he is being forced further and further left of center on his platform to gain the support of Sanders, Warren, millennials, and minorities. Trump, on the other hand, will continue to play to his far-right supporters. While we generally agree on his economic plan, we disagree with many of his social views and not gaining international support on foreign policy issues, especially dealing with China. The election will be greatly influenced by the state of the economy and whether there is another outbreak in the virus in the fall.
Stay tuned!
Market risk will continue to be mitigated by Fed. The huge amount of liquidity creation continues to force investors further out on the risk curve. The Fed is buying anything in sight including bond ETFs. Notwithstanding, investors have pulled hundreds of billions of dollars out of stock funds since March, parking in bonds, money market funds, and cash. While we see the market staying in a trading range, we are fully cognizant of the huge buying power for equities sitting on the sidelines. On the other hand, we believe that many stocks are way ahead of themselves and are vulnerable to a significant correction.
Bottom line is stay the course with the winners in our new normal. It is a win/win as these companies/stocks would benefit from a further outbreak in the fall reinforcing our stay at home thesis and/or they also will be the long-term winners as mindsets will be slow to change.
Our weekly webinar will be held on Monday, May 25th at 8:30 am EST. Remember to review all the facts; pause, reflect, and consider mindset shifts; turn off cable news; do independent research and… Invest Accordingly!
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
