Onwards and Upwards
While the markets want a V recovery, all signs point to a fast start off the bottom with the trajectory shifting to a slow but steady improvement in economic activity over the next 18 months.
The Fed will stay all in. The questions are to what extent the Federal government will step up to the plate with additional programs to safely get us to the other side without leaving many casualties.
Right now, many individuals and businesses are surviving from money provided by the government, the Cares Act as a bridge, but this will end within 6 weeks. Knowing how the market hates uncertainty we can look forward to volatility until the government passes another round of stimulus.
Powell pleaded with Congress last week to get on with the next stimulus program as additional financial support is needed. He also suggested that the government introduce programs to stimulate demand such as an infrastructure program. While we do expect additional assistance for consumers and businesses, we doubt that Congress will pass an infrastructure bill until after elections in the fall. Assuming additional financial support is passed, which is our belief, we expect the economy to continue to improve but not return to anywhere near where it was for a couple of years even with therapeutics and vaccines. Powell concurs.
We remain positive on owning risk assets due to all the liquidity provided by the Fed, and monetary authorities. The new normal economy will have higher than expected unemployment as corporations have learned that they can do the same-or even more in some cases with less-and we all know many small businesses just won’t make it.
Slack will remain in the economy for several years which will keep a lid on future inflation although we expect it to move back to 2% over the next eighteen months which will lead to a steepening yield curve. 2% is not high! We would avoid bonds for sure. The outlook for bonds could get even worse once the Fed begins to unwind its balance sheet which has expanded from $4 to 7 trillion in just three months. Do you really want to own 10-year treasuries yielding 0.72% or a 30-year yielding 1.49%? Hopefully our government takes advantage of these low rates and lengthens its maturities as much as possible.
There has been a surge in coronavirus cases and deaths in 18 states since opening last month. We are disappointed by the failure of local governments to enforce social distancing and the use of masks. While we do not expect shutdowns like before, the process of opening could be slowed down in states which would have an impact on the trajectory of the recovery. The economy is clearly improving rapidly at this point as evidenced by foot traffic at malls, store openings, and gasoline usage.
Now, it is interesting to note that work has home has remained at elevated levels. We believe this is because many business leaders are remaining rightfully vigilant which we hope and believe will become a new mindset in the new paradigm. Being nimble so that one can correct course quickly is also correlated to results in our economy.
Leaders are also being called upon to become more agile learners. They need the ability to learn from experience and apply it. They must be able to nimbly change to meet changing market conditions with the humility and determination to see it through.
We still remain optimistic that there will be therapeutics and even vaccines available in the fall. An inexpensive steroid named dexamethasone was found to cut the risk of death for Covid-19 patients on ventilators and by a fifth for those on supplemental oxygen. In addition, Lilly joined several others entering Phase 3 testing for vaccines. If proven efficacious and safe, the FDA could approve use of one or more of these vaccines before 2021. Good news.
It is important to note that Phase 1 of our trade deal with China is back on track after being put on hold during the pandemic. Secretary of State Michael Pompeo and his counterpart met Thursday and confirmed this. It was then announced that China plans to accelerate its purchases of farm goods to meet the agreed upon numbers in the agreement. More good news. It removes a potential problem for the market, at least for now.
Several new trends are emerging in addition to the internet beneficiaries of more time spent at home. Car usage and sales are up as use of mass transit is falling; house sales are strong as people exit cities and mortgage rates are at all-time lows; upgrading homes is strong benefitting appliance, paint companies, etc.; all outside activities are benefitting such as cycling, camping, boating, recreational vehicles. Also ticking up is at home activities, such as crafts and games.
At the same time, we expect negative trends to persist in airlines, hotels, cruising, gambling and restaurants. It is interesting to note that this past week Delta said that it does not expect to become profitable until the end of 2021. Well, that says it all.
While we do not see a V recovery, we are confident that the economy has bottomed and will see steady gains ahead especially if the Federal government passes a program to replace the Cares Act which ends July 31st.
The Fed and all other monetary bodies are all in providing huge amounts of liquidity that is finding its way into risk assets. The U.S and China confirmed Phase 1 of the trade deal which will help our trade deficit and reported GNP. Corporations will hopefully continue to shift their supply lines from China where we are too self-reliant.
Our outlook for 2021 has got better too as you know that we see therapeutics and vaccines on the near horizon.
Lastly, stop listening to the inane pundits on cable news who blow with the wind based on where the market closes that day. Focus on where we are going over the next few years. Of course, we are concerned that the Fed will have to shift its stance at some point, but it won’t come before 2023 if they keep to their current script. The election will come into focus more and more too, but here again, we cannot see much change in policy in 2021 or 2022 at the earliest until the economy has fully recovered and is on firm footing.
The bottom line is to hold the line, stay invested in equities and sell bonds. Having said that all equities are not equal. Stay invested in those companies that are adapting to or planning for the new normal and avoid those where demand will stay weak for an extended period.
Onwards and Upwards!
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Remember to review the facts; pause, reflect, and consider current mindsets; look at your asset mix with risk controls; turn off cable news; do independent research and …
Paix et Prospérité LLC