January 17, 2018. That was the day that the S&P 500 claimed the 2800 level for the first time. And it wasn’t a creep and crawl that got us there. U.S. equity markets had burst forward by an astounding 33% following the election of Donald Trump just 14 months earlier. Stocks soon ran out of gas, however, as issues regarding the trade war with China began raising their heads. The S&P 500 was still flirting off and on with the 2800 level until the end of September 2019… just a half-year ago. At that point in time, unemployment was at a 50-year low of 3.5% and GDP was growing at over 2%.
Can we take a giant step back for a moment? As of the end of last week’s trading, there we were again, flirting with 2800 after the massive rebound over the last two weeks. (The intraday high on Thursday, 4/9 was 2818.) This relief rally was largely led by confidence in the unprecedented trillions of dollars of Federal stimulus and seemingly endless Federal Reserve support. Yet, the fact remains that unemployment is likely already over 10% and heading to at least 15% to 20% before peaking (once the virus is eventually suppressed and the U.S. and global economies begin to reopen their doors). GDP estimates are all over the board, but most are calling for a drop in the second quarter of 25%-40%. No, we aren’t missing a decimal point. That’s roughly a third of the U.S. economy – temporarily wiped out. Yes, these numbers will reverse themselves somewhat after the COVID-19 crisis is behind us, but to what extent, and over how long?
We must ask ourselves, is the collective value of the 500 stocks in the S&P 500 worth today what it was two years ago, let alone six months ago? And even if you think it might be once this is behind us, how certain are you? How sure could you possibly be? With hotels, airlines, retailers, restaurants, energy companies, and a plethora of other American industries scrambling just to stay alive, I, for one, believe that the damage will be lasting and that American stocks on whole are not presently worth nearly what they were at new all-time highs just 27 months ago, certainly not what they were worth last fall, and likely won’t be for quite some time.
As we wrote last week, we are flying blind regarding economic data. Even for metrics we can accurately measure, like the exploding unemployment rate, numbers are moving up so fast (and will likely reverse with similarly blurring speed), that forecasting is useless and, to be frank, a pointless exercise. We quite literally can only guess blindly what the American and global economies will look like in 2021 or even 2022. And that is far more important than how many Americans lose their jobs temporarily (many for just a few months) and what GDP sunk to or recovered back to in Q1, 2, and 3.
When we do get back to some version of normal, it won’t resemble hitting a “do-over” button – with all American companies returning to their pre-coronavirus strides. A handful of new leaders will emerge, based on changes in American behavior and appetites. Some former leaders will bound forward stronger and more dominant than ever, but many companies and even entire industries will be too preoccupied with repairing their financial damage to embark on ambitious growth plans; others simply won’t make it, resulting in their sale or outright bankruptcy. One thing is for certain: the rising tide lifts all ships story that was so prevalent over the last several years is no longer applicable.
Leaky Drain or Dam Burst?
One feature of the CARES Act that can’t be ignored is the option for retirement plan participants who are affected by COVID-191Plan participants have to qualify by either them or a dependant contracting the virus or being financially impacted by virus related issues. Contact North Pier for specific rules. to access up to $100,000 of their money either in the form of a penalty-free distribution or increased access to a loan. Loans come with payment holidays and distributions allow taxes to be spread over three years and even paid back without taxes at all. With 16 million people thrown out of work thus far, how many of them will likely turn to those 401(k)s to make their mortgage or rent payments? And with these withdrawals being “self-certified,” you can bet that many people will simply use this as an opportunity to pull some money out of those accounts, whether they need it or not. Any way you slice it, that is money coming from both stocks AND bonds that will present a headwind to asset prices as those features get adopted by companies across America and become known to participants. (Most of these features went live at 401(k) providers like Fidelity and The Principal in the last week.) The only question is, how large will this impact be? Not only have we seen greatly reduced inflow of contributions due to layoffs, reduced participant contributions, and slashed corporate matching funds into retirement accounts, now we’re accelerating withdrawals. I can’t stress this enough: this is a big deal! And it’s not good for stock prices.
Still, the biggest deal of all is the trajectory of COVID-19. There the data continues to improve. Italy, the poster child of the pandemic, continues to see the growth of new cases decelerate, although not at as rapid of a pace over the last few days. Nonetheless, new cases are down approximately 40% from their peaks and are continuing to ratchet lower. Also important is that as new cases come down, the Italian healthcare system is not as overburdened as it was a few short weeks ago, leading to lower death rates and presumed better care for those who do contract the virus.
As we discussed previously, the countries neighboring Italy to the north were strong indicators of the likely path of the virus if early social distancing measures were adopted sooner in the cycle. Here the data has improved greatly. Austria and Switzerland have seen their reports of new cases diminish greatly over the last week, so much so that both countries appear to be well over their hump. Total active cases are now substantively in decline. These leading indicators give great hope to countries that saw the spread of the virus hit two to three weeks later, assuming they were prepared to enact isolation policies in earlier stages of the cycle.
Spain, Germany and France were the next large-population regions to be afflicted by the pandemic’s spread. Germany, which adopted social distancing measures early and has seen new cases fall over 50% from its peak. Spain, which saw its case growth spike to challenge that of Italy’s infection rate, has recently reported large drops in new cases, now off more than 50% from its peak levels. Lastly, France, which had seen some large single day spikes in new case reporting (apparently due to new classification of cases), has seen its new case rate level out at levels much lower than peak. (France’s chart shows erratic data and is omitted until effective pattern develops.)
Of key interest is the path of the virus as it spreads across the United States. Much to the relief of us all, it appears that the doomsday predictions of the Administration from just two weeks ago, that America would see 100,000 to 240,000 deaths due to the virus, were overly pessimistic (or perhaps sensationalistic). The recent estimates are now for something more in line with 60,000; still a tragic number, however one that is much more reasonable in magnitude. Daily new cases appear to have plateaued just above the 30,000 mark, which is a relief. Most states and metropolitan centers are reporting that they have enough resources to deal with peak levels of critical cases of COVID-19. This may be why our death rate initially appears to be well less than half that of Italy’s. Even in the worst-hit metropolitan area in the country, New York and New Jersey have seen the growth levels of cases decelerate. Though we’re not out of the woods, there is much new evidence to suggest that America’s experience with the virus will resemble that of most of Europe’s. If so, the coming week should see a decline in new cases here as well.
So where do we go from here? It’s anyone’s guess. There are simply too many inputs into the equation to predict. This is why we are recommending caution and measured approaches to risk at this time. Remarkably, we have recovered half of the massive losses experienced when measured at the lows of March. Perhaps a good portion of that recovery is warranted. Government and Federal Reserve intervention has been massive and swift. Further, the virus has not continued to expand at exponential rates worldwide, as many had feared, and the trajectory here in the U.S. appears to be manageable at this point. But while we all are staring so closely at the data on the virus and unemployment, let’s not forget the real question: what does the United States, and the world, look like when this is all over? Here too, we have far more questions than answers. How effective will the stimulus from the CARES Act and the Fed’s intervention be, and for whom and how quickly? And how and when do we pay the bill of all this stimulus?
Let’s remember that global stock markets sold off to lower levels than where they presently sit now back in the Fourth Quarter of 2018 based on the fear of a chance of a minor recession due to the trade war between the U.S. and China. Back then we were worried about tariffs impeding global trade, which might in turn upset our high employment rates and solid GPP growth. Well, the globe has stopped spinning altogether. Yes, it will restart; but the reality of the COVID-19 pandemic is far worse than any scenario our worst fears could have conjured back in 2018. So why are stocks trading where they are now? And where will they be trading in 6, 12, or 24 months? I will leave that for you to ponder.
Jim Scheinberg CIMA
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The information and statistical data contained within are from sources which North Pier Fiduciary Management, LLC believes to be reliable but is in no way warranted by us to accuracy or completeness. Source for selected data and charts: JP Morgan, U.D. Dept. of Labor, YCharts,com, Statista.com and Worldometers.info. North Pier does not undertake to advise you as to any change in figures of North Pier’s views. This is not a solicitation of any offer to buy or sell securities or services. North Pier, our affiliates, and any Officer, Director or Stockholders, or any member of their families, may have a position in and may from time to time purchase or sell any of the securities mentioned herein.