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The last month has seen record highs in the stock market, followed by a quick 10% pull-back, followed by a rebound. The key drivers seem to be economic news, both better and worse than expected, combined with the intentions of both the Fed and Congress on possible stimulus.
Coronavirus cases have started rising in many areas, but at least some of it is tied to more testing being performed. School has started up in person for some areas, and while cases have risen, mortality has gone down.
We saw some huge impacts in the tech world. First, Nvidia bought Arm, which matches up the graphics processing giant with the dominant mobile phone CPU designer. The result will change the future computing landscape as the world shifts away from large Intel-based processors to smaller, mobile Arm processors. Next, Oracle & Walmart bought TikTok…or maybe they didn’t. The court battle over this will surely be interesting.
As in the tech industry, the energy market is also seeing big changes. In the same week that California proposed banning gas powered cars, former titan Exxon saw its price hit a 20-year low. Its dividend yield hit 10% as a result, and investors are concerned about how the firm will afford it. Meanwhile, BP’s stock price hit a 25 year low.
Optimism tempered by uncertainty might be the best way to summarize the outlook. Many things are out of place, and we will need time to adjust. For instance US rail freight rates and volume are in unusual territory, but show some signs that growth is returning. Container factories that produce large shipping containers are backordered into 2021. Despite this promising view, the IMF thinks the coronavirus impact will last for years, albeit some countries more than others.
Several retailers are or will be doing large holiday hires, but with a change – many are for online sales jobs in warehouses rather than in-person sales. On the topic of working-from-home, the Harvard Business Review says knowledge workers are more productive from home than in the office. Google & Apple might agree, but JP Morgan doesn’t. Deutsche Bank is breaking with Wall Street by letting people work from home. Battle lines are being drawn company by company, and this may impactproductivity as well as the ability to attract new hires.
Well, we hope there are new hires, because as we expected, once the CARES Act expired, eviction filings jumped, and even worse, a group representing 85,000 landlords filed a lawsuit against the CDC claiming the prohibition on evictions is unconstitutional. Losing the suit would be bad, but winning might be pyrrhic. Such a situation where the upside is only a less worse downside is never good, especially when the decision affects roughly 1/3 of the population.
All the stimulus is creating unintended consequences that might be hard to unravel. The Bank of International Settlements is concerned about “zombie” companies – that is, companies that need bailouts to avoid bankruptcy. In that vein, it seems airlines will take any money they can get. You would too, if roughly 70% of your business still hadn’t come back.
Yes, change is coming, and it seems to be coming all at once. How much change? Well, US Tourism losses due to Covid alone are roughly a half billion dollars per day. Yelp sees permanent business closings currently 70% higher than in May. In line with our prior comments about many changes becoming permanent, many fast food chains are changing their restaurant layouts. That’s a significant amount of change that is primarily hitting the hospitality industry.
Worries about new lockdowns are surfacing given the new rise in COVID cases, but we think lockdowns will be replaced by prudence & pragmatism to manage any second wave. A 10% loss in economic output in a single calendar quarter is bad enough – two would be, well, much worse. With states’ budget already strained, many simply cannot afford another lockdown. We’ve learned much about Covid and its treatment in the last six months, and that knowledge is being put to good use quickly.
On the international scene, things might be deteriorating. Earlier this month, the US Ambassador to China posted an Op-Ed, which the Chinese refused to publish, suggesting that relations between the two countries is not on an upward trajectory. Meanwhile, in the near east, there is a war breaking out between Armenia and Azerbaijan, which seems to be in Turkey. So the international front is unpredictable across the board.
There is a lot of bad news. But is everything really that bad? VisualCapitalist has a great chart showing how the Covid Crash compares to past market crashes. While that’s only a market view, the US economy looks to have been average of the G-7 nations. Not bad when we’re also the biggest. Supporting evidence that people are becoming more optimistic is the biggest market for IPOs since 1999.
Some concern exists about inflation given all the stimulus this year. Inflation during Covid might be higher than normal measurements show. Multiple people have come to the conclusion that demographics have a significant impact on inflation, which, if correct, may alter views on government stimulus going forward, and might have been driving deflation. Our best guess is that the number might bounce around for a bit, but inflation is unlikely to rise too much in the immediate future.
So let’s end the Outlook with some good news – very good news, actually – the most recent CDC mortality data shows that COVID-19 is not nearly as deadly as we have initially feared back in March. For people under 70, the survival rate is well above 99%.
Now is a great time to start thinking about the holidays. Holidays cost money, and by starting your planning now instead of last minute, you gain the last few months to save before buying gifts, food, and travel for the holidays.
Also, the clock is ticking on your health insurance costs and expenses for the year. Have you met your deductible? Have you used up your FSA or HSA? On Jan. 1, many insurance plan deductibles – the amount you’re responsible for paying before your insurance plan picks up the bill – reset to $0. You have just a few weeks left to “use it or lose it.”
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
“You can disagree without being disagreeable.”
– Ruth Bader Ginsburg
RIP, 1933 – 2020