The month of September has passed with a loss of about 5% for the S&P 500. Underneath the surface, however, there was more turbulence. The winning stocks of the year, those most immune to the ails of the pandemic (Apple, Amazon.com, Facebook, Google, and Microsoft), fell roughly 10% compared to the average stock, giving credence to the fact that nothing goes up in a straight line. Bank stocks, a drag on performance this year as investors worry about loan defaults, held on remarkably well this month. Healthcare companies like Stryker were up 12%, which is interesting because the election is thought to hold risks for healthcare companies. More economically sensitive companies in the transportation and manufacturing industries showed the greatest strength with the standout being FedEx. It was up 12% in the month proving that when Wall Street gives up on a great company having short-term issues, it’s a good time to back up the truck and buy.
The reasons for strength in the more cyclical areas could reflect improving economic fundamentals.
The economic data has been getting better since the depths reached in April. To be fair, it was hard for it to get any worse. Nonetheless, consumer spending continues to lead the charge with online shopping and household improvements leading the spending spree. The unemployment situation has eased, but layoffs keep rolling in. This week, Disney announced layoffs of 28,000 employees but investors can continue to cheer with the stock 35% higher than the April lows. This further proves that great companies can overcome adversity and give patient and disciplined investors considerable comfort if a long-term view is maintained.
Still, there are storm clouds on the horizon. The market looks forward not in the past. This week Federal Reserve Governor Kashkari hit the nail on the head. From Bloomberg:
We’ve been surprised that the recovery has been faster than we expected, but it’s a double-edged sword,” Minneapolis Fed President Neel Kashkari says. “It’s been faster than we expected because we opened up more quickly than we expected, and we opened up more quickly than the health experts advised us to do […] So, I don’t think we should be surprised that we’ve seen these flare-ups around, across the South, and now we’re seeing flare-ups up here in the Midwestern region […] We’re seeing evidence that as it flares back up again, people are getting nervous. They’re saying: You know what, I’m going to stay home, I’m not going to re-engage in economic activity […] Looking forward, I think unless something dramatic changes, and we have a breakthrough — sooner-than-expected vaccines, or there’s some dramatic change in policy — I think we are in for a grinding recovery from here.Neel Kashkari via Bloomberg
The pandemic is in its second wave and the question is, will the recovery stall?
A continuous stream of layoffs, bankruptcies, and global economic dysfunction are all serious risks. The issue is further complicated by the political wrangling taking place in Washington D.C. The economic stimulus that was so important to igniting and sustaining the economic recovery in the U.S. has expired. More importantly for the future, U.S. politicians continue to bicker over the next phase of the economic bailout. It appears increasingly likely that both sides are coming to the same conclusion. Letting the economy (and hence their voters) suffer, will gain them political points in the upcoming election. Political calculus is a harsh game.
Our view is that a “deal” will get done at the last minute and this should help sustain the slow recovery for some months to come, acting as a buffer against the headwinds of a second wave induced slowdown.
Research on the vaccine front has seen equal shares of setbacks and promising early results. That makes sense given the early phases of tests. More positive news is expected as we approach the new year. Never have so many brilliant minds had such vast sums of money dumped in their laps with instructions to find a cure. While we feel confident that positive outcomes will follow, the timing of a broad-based ‘all clear’ signal will likely see us huddled in our bunkers well into the spring, if not longer.
Ultimately, the economic recovery depends on a return to “normal” and that’s where the timing is uncertain because while the printing of money can go on for now, it can’t go on forever. The global pandemic must be slain and then and perhaps more importantly, the global economy needs to start a re-sync. That global re-sync may end up being more difficult than finding a cure. Getting countries to patch up global trade rifts when the popular refrain is to see trade as a zero-sum game of ‘I win, you lose,’ is the next big issue. That’s a next year issue, but even that is up in the air right now.
Yes, ‘n’ how many times must a man look up
Before he can see the sky?
Yes, ‘n’ how many ears must one man have
Before he can hear people cry?
Yes, ‘n’ how many deaths will it take ’til he knows
That too many people have died?
The answer, my friend, is blowin’ in the wind
The answer is blowin’ in the wind