Let’s Make A Deal  

Why does our government wait until the 24th hour to make a deal to keep our economy afloat until we reach the other side? The Cares Act expires next week. How truly disappointing!
Jobless claims rose last week for the first time since March. There are over 16 million who filed for ongoing benefits last week. Time for Congress to wake up, do the right thing, and pass a stimulus bill to tide us over until the economy fully recovers. Our economy will recover but slowly and many sectors, including small businesses, just won’t make it. It’s time for our government to make a deal.
It appears that the new stimulus bill will most likely come in around $1.5 trillion.  The Republicans’ are proposing a $1 trillion-dollar package which includes unemployment wage replacement at 70%; $105 billion to help school’s open; a targeted additional round of the Paycheck Protection Program; $16 billion for coronavirus testing; tax credits to encourage companies to rehire workers; more flexibility for state and local governments for how they spend federal aid; and another round of direct payments to individuals.
The Democrats plan is closer to $3 trillion and includes $1 trillion for state and local governments. We expect a final plan to come in around $1.5 trillion and will include limited liability protection for companies. While we are not sure if a bill will be ironed out before the end of next week, we are confident that one will be passed shortly thereafter.
While the economy is continuing to expand, the rate of gain has slowed substantially making a follow-on stimulus bill that much more important. It will come but the markets hate uncertainty, so we expect more volatility in the weeks ahead trading on daily news bites. We would use this opportunity to add to some of the high-tech companies now under pressure as investors trim back and lock in some of their gains.  It is ironic that these stocks are under pressure now, just as the recovery is slowing and virus cases  are rising. Isn’t this one of the reasons that we owned them in the first place? These companies sell at a premium for a reason: great managements; winning strategies; strong earnings growth which will only accelerate as the economy improves; huge free cash flow and they are undervalued in today’s low interest rate environment. These companies helped us survive the pandemic and will be the winners in the new normal, too. Now is the time to go against the grain and pick up some of these stocks under pressure. On the other end of our barbell approach, we would continue to invest in the moderate growth/income stocks. Earnings reports have been better than expected and many of them announced dividend increases. Industrial commodity and gold stocks look good too.
The Fed meets this week and they will be looking at: a rise in cases in some states; many states slowing their opening; rising unemployment claims; the Cares Act expiring without a new stimulus bill in place; and very low inflation. Clearly the Fed will maintain its current policy but will face questions about what more can they do to support/boost the economy. We expect Powell to say that there are many more tools at their disposal if needed, to add even more liquidity and support to the financial system and economy. All good.
We are disappointed about the rise in coronavirus cases in key southern and western states. How interesting to see Trump finally wearing a mask supporting its use. He should have done this from the get-go but better late than never. We are confident that the rate of gain in cases is already peaking except in California, but the damage has already been done to the economy, slowing the rate of improvement. News on therapeutics and vaccines continues to be positive such that we still expect several more therapeutics will be available this fall and at least three vaccines will have successfully completed Phase 3 testing such that they will be available for those most in need. The government inked a multi-billion deal with Pfizer to supply over 100 million doses of their vaccine by the fall and nearly 1 billion by the end of 2021.
While the rise in cases in July slowed the economy, we are finally moving to the point where some southern states may slowly permit openings, once again, mandating masks, social distancing, and contact tracing. School opening will play a major role in how our economy continues to improve in the fall. Hopefully, it can be done judiciously/safely as outbreaks in schools will be met by quicker shutdowns which would hurt the economy.
We have not altered our view that the economy has bottomed but the recovery will be uneven. It will take until the end of 2022 for the economy to fully recover to pre-pandemic levels but that is not bad for the financial markets as it means that the Fed and government will remain all in providing all the liquidity and stimulus to take us forward. Even if Biden wins in the Fall and the Dems take the Senate, we doubt that they would enact legislation to raise taxes in 2021 or even 2022. In fact, we would expect them to pass pro-growth bills like an infrastructure program. If Trump happens to win, which looks less likely by the week, we would expect continued pro-growth policies too. The bottom line is that the Fed and government will have our backs next year and probably in 2022 too which is favorable for owning risk assets. 
Investment Conclusion
The financial markets are waiting for our government to pass a follow-up stimulus bill replacing the Cares Act over the next few weeks. We remain favorably inclined to own risk assets as both the Fed and government are both all in providing all the liquidity needed to carry us to the future. The key thing to remember is that we are talking about them staying all in for another 2+ years which has tremendous implications for investingExtraordinarily low rates plus a sound financial system translates into historically high valuations, especially for growth stocks. 
Another reason for our optimism is our confidence that there will be therapeutics and vaccines to combat the coronavirus. We consider what happens when/if one or more companies announce successful Phase 3 testing in a few months? What effect does it have on consumer and business confidence.? What happens to the economy once vaccines are available to all? We factor all of this into our investment outlook as a long-term investor.
Finally, companies are starting to take action, reducing costs, that will improve profitability in quarters/years ahead. On the other hand, it will mean that unemployment may stay higher longer than many of the economists think, but that is not all too bad as it may translate into higher productivity and lower unit labor costs which would translate into lower inflation down the road. Corporations are generating surprisingly strong free cash flow, too, which is indicative of bottoms in cycles. So far, 73% of companies reporting have beaten estimates Not too bad!
This truly is an astute stock picker’s market. We are doing the research finding new investment opportunities both in technology and in moderate growth companies. Technology is at the top of the list for so many reasons. We also look for other companies who have navigated through these times successfully and will come out stronger on the other side.
Think as an investor rather than making moves on every ebb and flow. Focus on creating long term wealth.
Our weekly webinar will be held on Monday, July 27th at 8:30 am EST. You can join the webinar by entering https://zoom.us/j/9179217852 in your browser or dialing +1 646 558 8656 and entering the password 917 921 7852.
Remember to review the facts; pause, reflect, and consider global mindset shifts; look at your asset allocation with risk controls; turn off your cable news; do independent research and …
Invest Accordingly!
Bill Ehrman
Paix et Prospérité LLC

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