I sure underestimated the size of the relief rally and my thesis has been wrong – so far.
The market has made a miraculous recovery. Certainly better than I anticipated. Yet perhaps a little ahead of itself. Basically, stocks are only down approx. 15% from the all-time high in February 2020. It seems to me that the US and world are more than 15% out-of-whack, so there is clearly a disconnect between the market and what’s happening around the globe.
A few data points to consider:
- There are now over 30 million people unemployed in the US – that’s almost 20% of the workforce; that’s 8 million more jobs lost than all the jobs created from 2009 – 2019; and that’s 21 million more jobs lost than during the entire Great Financial Crash in 2008-2009. Yes, many of these people will go back to work once the economy opens back up, but I think its clear many will not have a job to go back to.
- Both Chase and Wells Fargo have stopped doing HELOCs and have tightened conditions in which it will make mortgages, requiring higher FICO scores and bigger down payments for new loans. Why? “Wells Fargo Home Lending will temporarily stop accepting applications for all new home equity lines of credit after April 30,” Goyda said in an emailed statement. The choice “reflects careful consideration of current market conditions and the uncertainty around the timing and scope of the anticipated economic recovery.”
- As of April 29th, more than 3.8 million homeowners were in mortgage forbearance plans, under the governments CARES Act program. This represents 7.3% of all active mortgages accounting for $841 billion in unpaid principal. Applications to participate in the forbearance program have been swelling at a rate of approximately 500,000 per week.
The U.S. economy contracted -4.8% in the first quarter, according to the GDP release yesterday. It’s the largest contraction in GDP since 4th quarter of 2008. This was worse than analysts were expecting and was the first contraction since the first quarter of 2014. 2Q is going to be worse as much of the economy has been closed for the first month of the quarter. Perhaps the more astonishing data point was the decline in personal consumption, which shrank -7.6%. This suggests consumers were cutting back even before the economy officially closed. Even with a re-opening, it is hard to envision a scenario where consumers run out to spend. An economy that is 70% consumption may take longer to recover than most initially thought.
The key point is that the US economy is not Sleeping Beauty, ready to wake up at first kiss by the government. It’s true that $2+ trillion in government bailout money, and trillions more from the Federal Reserve, will blunt the damage. But it won’t stop the atrophy. It just slows it down. My outlook is for a slow, “swoosh” like recovery. Basically a sharp contraction followed by a gradual recovery over the next 18 months.
On the investment front, there is a disconnect between rising stock prices and falling corporate earnings. Based on my swoosh economic outlook, I estimate the fair value of the S&P 500 is around 2,600, compared to 2,912 where it ended April. This implies a potential 11% pullback from current levels. The big question is where are we in the process? Are we in the true recovery phase (see right side below) or are we at the early stages before things get worse (see left side below). The answer likely is based on the medical outcome. With a proven treatment for Covid-19 or a vaccine we are probably on the right side – without either we are probably on the left side.
Quote of the Day
“KEEP IN MIND THAT progress is not always linear. It takes constant course correcting and often a lot of zigzagging. Unfortunate things happen, accidents occur, and setbacks are usually painful, but that does not mean we quit.”
– Buzz Aldrin (Astronaut)
I hope this report is helpful. Please feel free to share with friends and family.
May Calendar of Events (comments and additions for future months are always welcome)
- May is National Mental Health awareness month. Nearly 44 million American adults, and millions of children, experience mental health conditions each year. Let’s all get educated on this issue and work towards acceptance and inclusion of people dealing with mental health issues.
May 5th Cinco De Mayo – stay thirsty my friends
May 10th Mother’s Day – wishing all mom’s, grandmothers, and great grandmothers a wonderful day. Hopefully soon we can get together to celebrate.
May 16th Armed Forces Day. Dedicated to recognizing those presently serving in our armed forces
May 23rd My daughter Caryn’s birthday
May 25th Memorial Day – let’s remember and give thanks to all who served our country
Sources: Strategas, Fidelity, CNBC.com, Dwyer Strategy
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