This Newsletter was sent to subscribers in June. 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.
Jobs, the stock market, and reopening after the lockdown have been the big topics of the last few weeks. Missed almost due to its obviousness is that we are officially in a recession. The US jobs report released on June 5th surprised everyone with apparently good news – people are starting to get back to work. That was a surprise, but the bigger surprise was the number. According to the U.S. Bureau of Labor Statistics, employment rose by 2.5 million in May, beating expectations of a loss of 8.5 million jobs.
To put that in perspective, that prediction error is larger than the population of Greece! As expected, the Dow Jones Industrials rocketed up 800 points on the news, and then, after a gloomy outlook from the Chairman of the Federal Reserve, it soon came back to earth over the next week. Fed Chair Powell sums up where the Fed is at, “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.”
States (and countries) that put lockdowns in place have started to open up as well. Given a first quarter GDP drop of 4.8%, states are eager to open up so that people can begin earning money (and also paying taxes). Since lockdowns were in place only for a few weeks at the end of the first quarter, this big of a drop portends a worse Q2.
Air travel has tripled since the beginning of May, but still only at about 20% of year-ago levels. May shipments of container traffic dropped nearly 20% versus the year earlier period.
All of this had led to massive government and Federal Reserve stimulus. Most recently, the Fed started buying corporate bonds. Whereas prior they were only buying bond ETFs, now they are buying individual bonds as well. This has led some to front run the Fed’s bond purchases.
One interesting thing seemingly related to the stimulus checks is that small investors have piled into the market, particularly through platforms allowing investors to buy a fraction of a share of stock. In particular, these investors have trended toward buying bankrupt or financially impaired companies, such as JCPenny, Hertz, and Chesapeake Energy.
This buying has been so voracious, that Hertz filed for what many are calling an “Initial Bankruptcy Offering” (a play on the term Initial Public Offering). What is key here, is that Hertz was offering up to $1 billion in stock that analysts think may be worth a negative $2 billion! Thankfully, Hertz pulled the offering when the SEC indicated a further review was needed.
Even Barron’s had a headline claiming that day trading has replaced sports betting as America’s pastime (even if slightly tongue-in-cheek). And nothing says “bubble” quite like a literal gambler claiming he’s a better investor than Warren Buffet.
We believe that the market will follow the economy, and that the economy will follow the virus…eventually. In between now and “eventually” will be a bumpy ride with many confusing signals. So with that, let’s start with the virus – both cases and deaths from Covid-19 are no longer falling in the US.
As for US GQP for the second quarter, depending on who you ask, you’ll get a different prediction. The Atlanta Fed thinks it will be slightly more than a 50% drop. The CBO is predicting 40%. Deutsche Bank and Goldman predict between 30-40%. Whatever it is, it will be ugly.
The May jobs report might not have been as good as it looked. It included a footnote at the bottom that many are focusing on. What is unusual in this case is that the footnote is a full page long, and then links to a 15 page FAQ specifically for COVID-related employment. To summarize, it is hard to measure layoffs versus “furloughed” workers accurately.
Offsetting the jobs report is the May US Retail Sales report, which surprised everyone at 17% growth over April’s report. Back in May, many states were either in lockdown or partial lockdown, so while sales were still below last year, this gives us hope for a better June.
The Port of Los Angeles, the biggest US container port, thinks that the recent loss of imports could be permanent, with its Director predicting a permanent 15% drop in imported cargo. Increasing retail sales and lower imports might mean more manufacturing in the US in the future.
The Treasury department, looking to get ahead of continuing economic issues, has indicated that they are planning for another round of stimulus payouts. While details still must be worked out, it is likely that whatever size this stimulus currently looks to become, if a second wave arrives, then the stimulus probably will grow in both amount and duration.
One confusing aspect in all of this is that the bounce at the bottom look the same in both a V-shaped recovery and a W-shaped recovery. Of course, the longer-term impact after that bounce varies considerably. Confirmation of a second wave or lack thereof will be the huge driver going forward.
Summer is here, which is when many people take family vacations. Given the various states of lockdowns for the CoronaVirus, vacations look to be muted this year. With that extra money, now is a great time to make sure your emergency fund is topped off to six months worth of expenses.
The purpose of an emergency fund is to handle life’s financial surprises, and this year has been full of financial surprises. So if you have some extra money from that vacation you didn’t take, your emergency fund is a great place to put it. You’ll sleep better once you have it filled up.
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
“Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.”
– Jim Rogers