This Newsletter was sent to subscribers in May. If you would like to get these when published, subscribe for free here. Quick Note - due to this unusual time, this newsletter will be longer than normal. If you're like us, you are probably stuck at home consuming more information than usual. So, we are making this issue longer than usual to give a more thorough commentary on the current environment.
Market Recap
The extent to which our world economy has changed over the past few weeks has been staggering. In the US alone, over 33 million people have lost their job since late March. GDP for the US dropped 4.8% in the first quarter, and according to Federal Reserve Bank of Atlanta, estimates for the second quarter are for a drop of 34%.
Air travel is even worse. The TSA is currently processing only about 6% of the passengers that it did a year ago. That’s not a typo – it’s six percent. To know how bad that is from a financial perspective, Warren Buffet, king of the buy-and-hold, bought billions of stock from the major airlines, only to dump it – all of it – several weeks later.
Many companies either have filed for Chapter 11 bankruptcy or are preparing for it. In some cases, the coronavirus simply sped up the inevitable end. JC Penney and J. Crew, for instance, were close to running out of money before this all hit. Others such as AMC Theaters, Gold’s Gym, and Hertz rental cars were profitable and growing but now are inching towards reorganization because of the virus lockdown.
Oil has been particularly hard hit as demand has fallen off a cliff, resulting in the unbelievable – a negative price for oil, where the seller had to pay the buyer $37 to take their oil. This collapse in demand has even had a serious impact on industry stalwarts such as Exxon which posted a quarterly loss for the first time in 32 years of $600 million.
Supply chains are suffering as well. Coronavirus-driven temporary closings of various meat processing facilities has caused a reduction of beef, pork, and chicken. So much so, that even Wendy’s (home of the iconic “Where’s the beef?” ad) is having problems stocking beef at 20% of its restaurants.
Banks have reacted quickly by stopping various activities now deemed “risky”. JPMorgan Chase and Wells Fargo have stopped issuing home equity lines of credit. That’s a hard stop, even if your credit is perfect and your last name is Rockefeller. Other changes include minimums of 20% down and a 700 credit score to buy a house. And those are absolute minimums, not guidelines.
Business activity in the service and retail sectors in general fell across the board. The April Non-Manufacturing ISM Business activity Index stands at 26% . For comparison, February stood at 57%. Clearly capitalism stayed home last month, and it wasn’t very fun for anyone.
Thankfully, May is the month when the lockdowns start easing, perhaps most notably in Texas both because we live here, and it’s the biggest state to start opening back up.
Market Outlook
The outlook is murky, but we can surmise a few things. First, travel will continue to be down, probably well into next year, and perhaps longer. After all, wide adoption of technology like Zoom will have many reconsidering whether to spend a couple of hours in close proximity to a 100+ strangers on an airplane.
Vanguard now sees a two-phase recovery (instead of the V-shaped recovery it saw just a few weeks ago). This brings most of the economic prognosticators inline with each other, basically all saying “this is going to take a while.” An early look at data from Chinasupports a longer time to recovery.
One thing that has gotten lost over the past few weeks is the reason for the lockdowns that states have implemented in various ways. The whole idea was to flatten the curve – not to minimize infections, but to minimize infections happening all at once and overwhelming the medical system.
Clearly, we’ve done a fantastic job across the board at avoiding that worst case situation. But some politicians are not yet ready to let go of their new power, with some extending lockdowns indefinitely. This has been met with protests, and we think theprotests will grow until politicians relent. Again, remember the purpose of flattening the curve.
If we can manage to keep hospitalizations manageable (and this will differ by country, state, and even city), then reopening states will become possible. But if hospitalizations jump again, then expect another lockdown for some states (some states will lockdown, others won’t). Making it more erratic is the fact that this is an election year, so voices will come out of the wilderness to support one point of view or another.
The political chaos will add to our already stressful lives. Home schooling, unemployment, being homebound, and not being able to eat at our favorite restaurants is a continual irritant in the American psyche. Adding inflamed politics to the mix will make that irritant worse.
Mitigating local political issues somewhat is Congress. Specifically that everyone in Congress wants to keep their jobs. And the best way to for Congress keep their jobs is to give things away for free. We’ll have to pay the piper eventually, but we expect that unemployment benefit increases already enacted for Covid will be extended past the election. Further stimulative spending in other areas (such as infrastructure) is sure to come as well, especially if employment doesn’t bounce back quickly.
The Fed has been busy as well, with the announcement that they would be buying corporate bonds. One popular high-yield bond fund jumped 6% on that news – the biggest one-day gain since the financial crisis. This stimulus has increased the value of the stock market as well, making it hard for investors to determine what to buy or sell.
In short, although the employment numbers of the past 2 months have broken all sorts of records, the future actually depends the most on whether we will go back to our old habits, or if the lockdowns have changed us. In a jarring event that we are still going through, we expect that just like 9/11 impacted security, the 2008 financial crisis impacted banking, and the 1970’s oil crisis affected automobiles, the current crisis will have lasting effects on many facets of our way of life. This will not be a v-shaped recovery, and we should be expect a long, hard slog.
Quick Tip
The CARES act changed the way Required Minimum Distributions (RMDs) from retirement accounts can be managed this year. Specifically, you do not have to take the money out for your 2020 distribution.
This presents a great opportunity for some. Rather than leaving the RMD money in your IRA, you can convert that amount into a Roth IRA.
For those doing estate planning, this allows you to use the tax-advantaged nature of a Roth IRA for your beneficiaries while paying the taxes at today’s historically low tax rates.
As always, consult your advisor to see if this approach will work well for you.
Finally, a public service message: Many of our clients, friends, and families are part of at-risk households. For their sake, please wear a mask.
Words of Wisdom
“I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”
– George Soros