“It is wiser to find out than to suppose.” – Mark Twain
The morning’s Wall Street Journal is a sort of caricature of how similar our current perception of reality resembles that of a clam shell, joined together with a modest amount of membrane but more separate that together. The Dow Jones Industrial futures indicate an opening (this is written prior to the market open on July 6th) positive 382 points or 1.48% but with the day’s headlines including “U.S. Coronavirus Death Toll Nears 130,000 as Infection Rate Surges”, “Coronavirus Hits Nation’s Key Apple, Cherry Farms” and “Behind Oil’s Rise Is a Historic Drop in U.S. Crude Output”.
The division in people’s perception of reality is reflected by a similar division in the market itself. In the current year’s first quarter the S&P 500 was -19.5% but in the second it was +20.5% leaving the index down 3.1% at the year’s midpoint. Hiding behind the market’s near break even performance though was a dramatic variance of fortune among its the eleven industry groups with Energy stocks down 35%, Financial stocks down 23.6% and Technology stocks up 15%. Given Energy and Financial stocks concentration in the Value portion of the market the S&P 500 Value Index is down 15.5% while Technology stocks, concentrated in the S&P 500 Growth Index, results in that index being up 7.9%.
Bulls and Bears are united in acknowledging the existence of recovery in the U.S economy but separate in their opinions related to the recoveries durability and rate of increase. Bears point to the seven-day moving average of new Coronavirus cases bottoming at 21,282 on June 9 having increased to 39,662 on June 28, an 86% increase in only 19 days. Bulls point to a similar 84% decline in the number of Coronavirus deaths from their peak on April 19th to their level on June 28th.
Even those not wishing to wade near the hazardous shoals of the politics of the pandemic should be able to agree that if it is not disappearing it is nonetheless migrating as states such as New York and New Jersey which previously experienced the highest levels of lethality have seen substantial declines in those rates while states such as Texas, Arizona and Florida have reversed some of the measures they had undertaken previously to reopen their economies. Also of interest is that the three countries reporting the largest number of virus related deaths, Brazil, Mexico and India, were in April experiencing very low fatality rates while countries such as Spain, France, Japan and South Korea, which were among those countries first experiencing the pandemic in March and April, two day’s ago on July 4th reported zero virus related deaths.
If opportunity is equal to the distance between perception and reality then is remains quite possible that the opportunity to profit in the equity markets continues to be significantly greater than most believe it to be. Here I’ll draw upon the wisdom of James Carville who, back in the 1990’s, was quoted as telling the then presidential candidate Bill Clinton “it’s all about the economy…”. When it comes to forecasting the prospects for the stock market over the next six month’s I’ll echo Mr. Carville’s sentiments with “amen” and “amen”.
Our friends at Vanguard have been relatively constructive on the outlook for the U.S. economy these past several months. This past Thursday they forecast a decline in the U.S. unemployment rate to 10% by year’s end. That same day nonfarm payrolls were reported to have risen 4.80 million in June verses an expected gain of 3.23 million resulting in a decline in the reported unemployment rate from 13.3% in May to 11.1% in June. The past two months have seen a recovery of one-third of the payrolls lost in March and April. What if in December of this year the unemployment rate was at 7%? Think that number has yet been fully discounted by this market?
Looking through the rearview mirror at the economic damage caused by the pandemic is still a jaw dropping experience.
The week of May 20th the numbers of individuals boarding outgoing flights was 10% of that of year ago levels. The week of July 1st it was 25%. In February new automotive sales were at an annualized rate of 17 million. In April in was 9 million. In June 13.3 million. For the week of June 28, 2019 9,492 thousand barrels of gasoline were consumed by motorists on a daily basis. For the week of April 24th of this year it was 5,860. For the week of June 26th 8,561. In January of this year 780,000 single family homes were sold in this country. In April 580,000. In May 680,000. These numbers show an economy well on its way to recovery and yet still some significant distance away from the economy we were experiencing at the beginning of this year.
This market wants to go higher. That is a good thing. These have been very difficult times but the future contained in these next several months will be much better. If this is, as I believe it to be, true, then this is something we can all celebrate together.
Mark H. Tekamp
July 6, 2020