Alchanati Campbell & Associates
In normal times, the stock market and economy are not correlated, but have more of a causal relationship. When employment is in full strength and GDP growth is increasing, we can expect companies to have stellar earning reports and distribute a gracious return to shareholders. Today, there is a huge disconnect between the stock market and economy where the economy looks more like a depression, but the stock market looks like it just started its next expansion. In this day, politics has more of a deciding factor on our stock market than corporate finance and economics. I say its too soon for this ambition rebound. The world is changing and will forever be changed. Globalization will look more like a risk than an opportunity. The equality gap will widen. Our health care systems will have to restructure. Our fiat currency system will be tested. Ultimately, there will be no market place (normal buying and selling) for a while.
The Fight Continues. As the United States presses forward with its battle against the novel Coronavirus, some Americans have grown weary of the economic consequences of the massive economic slowdown. Right now, more than 97% of Americans have at least some confinement guidelines set by their local governments while tens of millions are under stay at home orders. These measures have not only drastically affected the economy but also tested the patience of many Americans. This last week we have seen an increase in protests against safety measures even as the death toll climbs past 51,000. This begs the question, should the U.S reopen to minimize the economic impact at the cost of human lives?
Today, The US Congressional Budget Office announced that they expect the federal budget deficit to hit $3.7 trillion by the end of fiscal year 2020, making it the largest budget deficit since World War 2. They also estimate that the federal debt to GDP ratio will hit 101%. At the same time as government spending is heavily increasing, they predict the economy will contract by 5.6%, and unemployment will still be as high as 16% in the third quarter and average 11.4% for the year. By comparison during the Great Recession, unemployment peaked at 10% and the largest annual contraction in GDP was by 2.5%. Many other countries are also facing a grim economic outlook as the world has seen a severe decline in services, manufacturing, and global trade (shown in the figures below). As discouraging as the data is these circumstances have not been encountered in modern times and the possibility of a V-shaped recovery can not be entirely dismissed. So, should states allow businesses to reopen and people to get back to work? We will let you decide since it comes down to how much value you place on a human life.
Trump facing a hard path to victory as pandemic rages. With the upcoming presidential election looming large in November, President Donald Trump had seemingly laid out strategy similar to the one that brought him victory in 2016 against Hillary Clinton, full of delegitimizing attacks on reputation and catchy nicknames. This election calculus has been thrown into disarray with the onset of the COVID-19 worldwide pandemic. The present crisis has forced the president to act in a manner not often associated with his character, including working with Democrats to pass legislation, continually hosting experts who have publicly disagreed with his past statements, and attempting to make eloquent, scripted remarks to the entire American people, calling himself a “Wartime President.” While crises do have the potential to substantially increase a president’s approval ratings, they have just as much potential to dissuade previously enthusiastic voters of a president’s competence in the job. For his part, President Trump has mobilized national resources to respond to the pandemic and has overseen the deployment of military and emergency resources at a record pace. However, his initial response to the pandemic was unenthusiastic, with the president publicly blaming both the media and the Democrats for blowing the story out of proportion, before finally declaring a state of emergency upon him personally almost being exposed to the virus. His present demeanor has won him some support, as his approval rating has finally edged above 50%. However, he is still projected to lose to his Democratic counterpart, former Vice President Joe Biden, including in Fox News polling that shows Biden winning in Michigan, Pennsylvania, and Florida. The crisis has not helped Trump narrow this lead, though the election is still 6 months away, and much could change as election season heats up. While polls are not necessarily indicative of future election results, Americans have a tendency to rally around leaders during national crises, and Trump not receiving more of a boost during this time should trouble him, and his campaign greatly as 2020 drags on.
Not Taking a Position. With the equity market trading between a range of 35-50 VIX, the bond market volatility between 60-100 (signified by the MOVE index), and oil volatility near 175, it's a traders dream. The issue is we aren’t all traders, and can’t take full advantage, if any, of the constant price movements. A high volatility environment means that price changes are occurring much faster than usual, and trading time has been sped up. If you don’t have experience trading these markets, it's more likely than not, that you will be whipsawed back and forth and ultimately end up on the bad end of the trade. Personally, I don’t have time to sit and trade these markets the entire time, so I’m taking a position most people don’t realize exists, not taking a position. With unemployment nearing 20 million, businesses starting to go under, lockdown being extended to may, fed decreasing rates to 0% w/ nothing but cash left in the arsenal, and increasing the federal balance sheet to an unprecedented 6.6 Trillion, the market seems to still be pricing in a near best-case scenario being just 20% off 2019. “Markets can stay irrational longer than you can stay solvent.”
Opening the Economy. As people across the country begin to become more and more agitated with a government-imposed "quarantine" (protests, a general relaxation of strictness), it's very plausible to consider the pros and cons of opening the economy back up and resuming operations in a somewhat normal capacity. The pros of doing so are fairly simple and obvious. Opening the economy back up would, essentially, be as if nothing has changed. Of course, there would still be the massive layoffs that we have already seen, as well as a change in consumer habits. Nonetheless, if businesses reopened their doors, individuals would go back to work and continue getting a paycheck if they have not been receiving one during the quarantine. This means more money to spend on goods and more grease on the cogs of the economy.
What if it doesn’t go so well? What if there is a second, equally intense wave of infections in the fall (as global health organizations/professionals are predicting? What if we open the economy back up to early, and that second wave is even more intense, resulting in more infections/deaths? Surely, the impact on the economy could be even greater than if it were to just remain closed now. A few financial newsletter writers can't predict how a global pandemic is going to spread. But we can look at some of the logic surrounding the economy. If people stop working, stop getting a paycheck, and remain home, what will happen? Well, we're already seeing this now, but on a more long-term basis, it could lead to more deaths as people won't have the money to buy necessities and otherwise survive. That is, they won't have the means to survive without assistance, most of which will have to come from the government. Having already given out over a trillion dollars, many people are looking at the government to do more. How much more can the government handle given the current record debt and deficit levels? It would take a restructuring of the budget, we fathom.
In additional long term impacts, many small companies are closing their doors right now, never to re-open again. Filling that void of small businesses will be the giant conglomerates, leading to greater market share for those companies, and generally a greater capacity to manipulate the market and harm consumers.
The ACA Foundation
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.