Ehhhh, what’s up, doc?
October 12, 2020
At the End of Q3 2020 – Investors were surprised to learn that President Trump was infected with Covid-19. The stock market dropped for only a day as the news that he was not seriously ill became known.
Markets moved higher in July and August. Then, in early September, investors became skittish, and major U.S. indices recorded losses for several weeks.
Headlines have driven prices up and down. Expectations for a new “stimulus” bill and progress on Covid-19 vaccine development change every few days.
Additionally, the Federal Reserves’ recent presentations have extended expectations of a rapid economic recovery. Chairman Powell has repeatedly informed Congress that the Fed is now quite limited and legislation is essential for household and business survival.
Further, the Fed intends to keep interest rates near zero for the “foreseeable future” which seems to be 2022-23. The Federal Open Market Committee (FOMC) statement provided a big picture explanation, “The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”
Market volatility is driven by investors’ fears of loss and fears of missing out. Many risk issues needing resolution fall into a binary set of outcomes:
Will President Trump be elected or not?
Will VP Biden be elected or not?
Will a stimulus bill restore unemployment checks or not?
Will a second Covid wave happen or not?
Will taxes go higher or not?
A stimulus bill and vaccine are both highly probable. When remains unknown. The election will determine several of the other questions.
Investors continue dealing with the disconnect between headline indices and the general health of the majority of the stocks on the exchanges. Large technology companies dominate the prices of the indices and are the target of high frequency trading by major broker-banks.
In August, the value of the top five companies in the SP 500- Apple, Microsoft, Amazon, Facebook, and Alphabet- was 9% greater than the total market cap of the bottom 300 companies in the index. Adding Netflix and Google causes even greater exaggeration. Without the dominance of what we call the FANMAG factor benefiting greatly from Work-From-Home conditions, it is doubtful the index would appear as it is.
Corporate earnings have been falling for several years. If a company’s price has not trended down, it has usually been confined to a sideways trading range.
This week corporations begin reporting their sales and earnings for last quarter. We expect many to “beat” the analysts estimates since forecasts have been significantly lowered. Many industries have been repressed by government mandated closures or limitations on the number of customers a business is allowed at any one time.
A business site, Yelp.com, reports that 60% of its listed businesses that have closed, will not re-open. Violence in major metropolitan areas has created a fear of shopping in many traditional brick and mortar retail locations. Combined with the ease of shopping on-line, normal consumer spending patterns have changed – possibly, permanently. These factors contribute to lower economic growth forecasts.
In addition, a frequent call we receive is about the Federal government borrowing “out the wazoo.” It is true. As household and business managers know, there is a limit to the amount of debt one can handle and survive. The same rules do not apply to a government that can print its money and raise its debt limit. Congress will raise the debt ceiling again.
To do otherwise, would end a plethora of government programs that directly or indirectly provide income to individuals who spend money supporting the economy. Like it or not, it is what it is.
Changes are in our future as the financial markets grapple with significant realignment of major asset classes. Specifically, commercial real estate which will take years to adjust to new vacancy levels. The banking industry will have years of very low interest rates. The oil industry remains dependent on global economic recovery and massive supply.
Expect an increase in bankruptcies as households and businesses adapt to the post-Covid world.
Question? Call us. 800-317-9119.