May 7, 2020
Don A. Keeney, CFA, CFP
Principal, Portfolio Manager
I was having a conversation with a client recently, and it was a comment he made in passing: “I guess we are all in a bit of a transition right now”. I agreed and the conversation quickly moved to more pressing topics. But the quote has stuck with me and how true it is! There are so many different aspects of life that are in transition right now. I think it is important to talk through those aspects and help refocus our minds on what has changed, what is continuing to change, what will remain the same, and what that potentially means for the future.
Where to start?!?! The coronavirus has upended the world as we know it. It introduced itself in short order and has completely wrecked so many things around the globe. Let’s try and work through a loose chronology of the daily things that are in transition. Fear came first. Fear gripped the world and a desire to get safe (and stay safe) took root with astonishing quickness.
• (I’m sensing a three-word-trend)
• Social Distancing & Self-Quarantine
• Six Feet of Separation
These new mantras have shaped our daily living. We ultimately are responsible for helping to stem the growth and spread of the virus. We continue to live every day with these things top of mind. It has impacted us materially: how we shop (or don’t shop); how we visit friends and family; and how we greet people. We have discovered just how many of our neighbors we had never even met; have installed daily walks/exercise; and have lost track of what day it is. These changes don’t even consider the impact on our daily work life! There is absolutely no doubt that people/consumers/citizens of all countries are in a state of transition.
The response to the dislocation felt by everyone has been swift and unprecedented. The US Government has committed to deploying $2.8 trillion in fiscal stimulus to try and combat the issues being faced by the country. To keep it in perspective, that amount is four-times the amount that was employed during the Financial Crisis in 2008. On the monetary side, the Fed was pumping in a high of $75 billion a day into the system (it has been reduced to $40 billion a day more recently). That compares to $120 billion a month during the peak of the QE program back in 2008. Clearly, the Fed and the US Government are trying not only to come to grips with the pandemic, but to provide a pathway to recovery. Their state of transition cannot be more apparent.
Economically, the transition has been swift and brutal. Businesses closed. Businesses are staying closed. Consumers closed their wallets. Consumers continue to keep them closed. The most recent figure for the domestic savings rate was 13.1% for March, the highest savings rate on record since 1981. I think it is fair to say that this figure went higher in April. Businesses are hoarding cash also … well, at least those who are credit worthy. Across the board, businesses have been drawing down credit lines, bulking up their cash reserves, suspending stock repurchases and many have cut or slashed their dividends. Companies are preparing for the uncertain environment.
Earnings season has been in full swing the past few weeks and it has been interesting from multiple angles. The “haves” vs. the “have nots” has been incredibly apparent. Many (not all) technology, health care and consumer staples companies are the “haves”. Energy and many (not all) consumer discretionary (think travel and entertainment) companies are the “have nots”. Truthfully, first quarter earnings reflect only ½ of one month of the coronavirus impact. The numbers for next quarter are the ones that are going to hurt. Companies spent a lot of time going over all of the work they have done since the coronavirus kicked in: instituting employee safety protocols; employing new customer safety protocols; creating remote working environments; reworking their supply chain; solidifying the balance sheet through cash flow prioritization of their capital spending plans; and creating/managing liquidity needs for the business. It is not an accident that I didn’t mention business planning or future financial guidance – very few companies felt confident enough to provide any.
Economic statistics are on the same time frame as corporate earnings – trailing the realities of today. We are just now beginning to see the bad economic news ramp up. We know it was bad. We know the numbers are going to exude the pain we have all been feeling and seeing. Initial Claims have cumulatively hit 30.3 million new jobless claims over the last six weeks. The trajectory had been improving week-to-week, but the numbers remain large and negative.
The first estimate of the first quarter GDP was reported at -4.8%. Economists were estimating a drop of 4.0%. Worse, was Personal Consumption reporting in down 7.6% (the fastest decline since 1980 and double the worst decline from the Financial Crisis in 2008). Wanna hear about the second quarter? Ugghhhh. Not Pretty! Estimates are all over the map: Goldman claims GDP will be down 24%; the Atlanta Fed suggests down 16%; and JP Morgan is currently projecting a 40% drop next quarter. We can worry about that later.
And that is really the point about life in transition. There is no doubt that expectations between now and June 30 are going to be materially different. The stock market is trading on these expectations, not the realization of these poor economic numbers. Again, we all know its bad. But the expectations are the driving force of the market. How do I know this? Well, in light of everything I have been talking about: reporting of poor earnings; worsening credit worthiness for businesses and consumers; declining economic numbers; increasing unemployment rate; and mounting potential for entire businesses to disappear; the market has posted a 12.8% return during the month of April. This monthly return is the best since 1987! The stock market responded negatively to the fear and uncertainty about the future on the way down and it has responded favorably to the prospects of improving expectations. People are more confident that we will find a vaccine, that the vaccine will be fast-tracked like never before seen, and that people will be able to get the medicine if they are in need. It may be unclear on exactly the timing, but it was only last month that expectations were for a five-year turnaround on a working, viable vaccine. Economic responses have been swift, even if they have been a bit disjointed. There is no single working plan for re-opening the economy … you guessed it, those new policies are in transition as well.
As you can see, April was a month in transition. It is possible that things stay that way through May, but only time will tell, and it will be materially impacted by the successes and failures of re-opening the economy across the country. Earnings season continues next week but is coming to a close. Investors will have the time to digest all the information and start to formulate ideas on how things are progressing and how they will continue to progress. We are doing the same at M Capital Advisors – pouring over corporate results, looking for strength among the apparent weaknesses, considering the long-term themes that keep companies focused and moving forward with a tailwind, and finally, what the actions of the Fed and the government will be as they continue to create and revise fiscal policy. There are winners and losers in this market – our job is to find the former and avoid the latter.
If you have a question or need further information, please contact:
Don Keeney, CFA, CFP, Principal & Portfolio Manager in Nashville at 615-866-0882, or firstname.lastname@example.org
Claude Koontz, CFA, Principal & Portfolio Manager in San Antonio at 210-353-0519, or email@example.com
Mastrapasqua Asset Management, Inc. does business as M Capital Advisors.
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