Reopening the economy
The narrative has flipped from 'how much worse is this going to get' to 'how quickly can we reopen the economy.' We seem to have moved from pessimism to optimism. And based on the trajectory of the stock market, investors appear to be buying into the optimistic narrative. Is that wise?
Georgia, Oklahoma, and Alaska are leading the reopening charge. Nevada tried, but it was beaten down by popular opinion and health authorities.
However the reopening unfolds, it will be gradual. Social distancing will be part of life for months, if not years. And that means there will probably not be a rapid recovery of jobs, or an end to the litany of bankruptcies that is just now getting started.
Retail stores, restaurants, bars, casinos, cruise ships, concerts, movie theaters, and other venues that depend on packed audiences will be slow to return to anything approaching normal capacity. The result will probably be a slow recovery from what will certainly be a recession that began in the second quarter of 2020.
From Barron's
When the coronavirus crisis first started , it was immediately apparent that it would be like no other. It was one that forced Americans to stay inside and businesses to shut down, and caused the S&P 500 index to fall from an all-time high into a bear market in record time. Policy makers and government leaders seemed to realize just how dire the situation was and responded with trillions in monetary and fiscal stimulus, and that kept the crisis from getting out of hand at the onset.
We all know, though, that everything isn’t all right. The stimulus money has bought us time, but not much else. And the longer the virus prevents all of us from doing what we usually do, the greater the pressure on financial markets is going to grow.
We got a hint of that this past week when the price of oil turned negative . We can talk all we want about how it was just one futures contract, that it was caused by technical factors due to that contract’s expiration and the lack of storage for the oil that owners of those contracts would have to take delivery of. But just think about how strange that is: If you owned oil, you had to pay someone to take it from you.
The stock market’s reaction was even stranger. Stocks fell hard for two days—first, ones with the most exposure to oil, then everything else—then started to bounce back. By the end of the week, the energy sector had turned positive for the week, and oil was an almost afterthought. It should be considered a warning. “When assets like oil swing wildly, we pay attention,” writes Lindsey Bell, chief investment strategist at Ally Invest.
As well we should. The oil patch had some big problems even before the coronavirus came along, but it wasn’t the only sector under fire. And the longer the virus forces economies around the world to operate at a fraction of their capacity, the more other problems will crop up. “If the economic collapse accelerates and individual markets come under extreme pressure (like oil this week) downside risk will increase,” writes Evercore ISI strategist Dennis DeBusschere.
Some of the possible hot spots are obvious. Senate Majority Leader Mitch McConnell (R., Ky.) highlighted one when he said he is “in favor of allowing states to use the bankruptcy route .” With so much of the economy shut down and fewer tax dollars coming in, state budgets are getting squeezed. And it isn’t just states that are having problems—they stretch to municipalities of all shapes and sizes .
Europe is also a mess. Germany is spending massively to support its own economy, but Italian bond yields continue to rise, as the European Union tries to agree on some sort of fiscal package for its weaker members. At its meeting this past week, the EU bickered about whether the money should come as loans or grants—and left without a solution.
Emerging markets are under obvious pressure. Turkey’s lira has dropped more than 14% in 2020, while the Brazil real has fallen 27%, the Mexican peso tumbled 24%, and the Russian ruble has slumped 17%. Those are massive drops, and normally they would at least have made exports from those countries cheaper. But since there are few exports, all they’re doing is putting a strain on the countries’ budgets.
Bank of America strategist Claudio Irigoyen points to Latin America as among the most problematic regions. “The global and regional impact of Covid-19, combined with a collapse in oil prices, created a perfect storm for LatAm,” he writes.
Dare I go on? We could add junk bonds, the potential for food shortages , small-business bankruptcies, and a slew of other problem areas to our list. The longer the coronavirus keeps a lid on economic activity, the greater the potential that anything could become the next flashpoint. When asked where the next blowup might come from, DeBusschere told Barron’s. “EM is at the top of my list. But other than that, it is about the unknown.”
Against that backdrop, it seems almost ridiculous that the S&P 500 fell just 1.3% to 2836.74 this past week—still up 27% from its March 23 low—while the Dow Jones Industrial Average dropped 467.22 points, or 1.9%, to 23,775.27, and the Nasdaq Composite declined 0.2% to 8634.52.
But then again, maybe not.
On Thursday, the World Health Organization accidentally released what appeared to be disappointing results from a trial of Gilead Sciences ’ (ticker: GILD) remdesivir, a potential treatment for Covid-19, causing the Dow’s 400-point gain to disappear in an instant. The index then rallied to close at its high of the day on Friday following reports that Gilead’s drug trials may yield results by mid-May and that the interpretation of the trial results was perhaps wrong.
It isn’t every day that drug-trial news can move markets like that, suggesting that the market knows that anything that can get economies up and running that much sooner can make a massive difference.
It’s a race we can’t afford to lose."
Final Thoughts
The most frequently asked question I get from clients, subscribers, and readers is this: "Is it time to get back into the market?" The only honest answer is "I don't know." But I'm advising clients to start nibbling around the edges of the market where bargains are beginning to appear.
Take energy, for example. Those of us who are paying attention know that the price of oil and natural gas are at multi-decade lows. Doesn't it make sense to start building positions in the energy space when prices are this low?
I have other ideas to share, and I'm going to put them in my upcoming Monthly Intelligence Report. Check it out here.