Alchanati Campbell & Associates
What's up Pandemic Rebound?
Disclosure: The ACA Foundation’s Newsletters are looking to expand more into investing and finance-related topics with its new partnership with Panther Capital. This will include coverage of equity analyses, industry analyses, positioning and allocation, and an overall content focus on the stock market and global macroeconomic events. We will be sending out “What’s up?” Daily Alerts consisting of short bullet-points and graphics of what we see and hear in the market and around the world on a daily basis.
There are two distinct ways you can view the market now. The first is you see the economy opening back up relatively soon. You see employment surging again, consumer spending and consumer confidence becoming positive, and overall business investment/spending normalizing. So, you decide to buy into the hardest-hit industries: industrials, manufacturing, oil, airlines, cruises, precious metals, store-front retail, luxury brands, shipping, and REITS. The second is you see the economy getting worse than it is now and staying shut for a couple more months even when the government and Feds will do “whatever it takes” ignoring moral hazard. Unemployment could get much worse, there could be more underlying liquidity and solvency problems, and the stock market can revisit its early March lows. In this, you would be more defensive but smart. Even though there would be an overall sell-off in all asset classes (like we experienced in March), some asset classes would fare better than others. You would position in tech, e-commerce, biotech, and healthcare. The Nasdaq, which is a composite of some of the biggest tech stocks, retraced from its lows of 30% from its February 2020 highs to around 12%. Tech has been performing well during this time with Amazon and Netflix (two of the FAANG) hitting new highs.
Retail and Manufacturing. Predictable and perhaps unavoidable, retail sales underwent a record plunge in March, dropping 8.7%. Amongst the spread of Coronavirus, businesses were forced to temporarily close their doors. Spending in areas such as Food/Beverage and Healthcare Products saw a spike in sales, but that spike is nowhere near large enough to make up for the drops in other key areas, such as Clothing and Accessories and Food Services. Analysts were forecasting an 8% drop. The news led to a tumble on Wall Street.
The Retail numbers provide a window into the effect on the American economy as a whole. Retail is a huge part of Consumer Spending, which in turn is responsible for over 66% of the American economy. With the grim retail numbers, economists believe the Consumer Spending drop will be the greatest since the number has been tracked.
In the spirit of pure speculation, we have thought about some of the longer-term impacts that Coronavirus could have on consumer spending and our economy. Something that, for the economists in the room, will shift the demand curve to the left. A change in consumer habits. With no definitive end to the shutdown in sight, it is rational to think that consumer's short term adaptations could eventually turn into lifestyle changes. They can realize they don't need to shop at certain stores, or eat out as much, or go to movie theaters. The list goes on. Just something to think about.
Let's talk about China. For the last three months, China has dominated international headlines due to the novel coronavirus. Since the virus began in China, it is easy to look to the country to estimate how the COVID-19 might impact different areas. At first, early data from China was looked at to examine how the virus might spread, but now that China is well underway with reopening their economy, many economists are looking to China to estimate how fast the rest of the world can recover, or how badly the global economy will suffer. While the majority of the headlines are unbiased, fact-checked, and data-based, there is one issue we at The ACA Foundation need to address: misinformation. The global pandemic has led to a large sense of fear and mistrust, some of which have been placed on China and has led Chinese officials to place blame on The United States. This exchange of misinformation, especially between the President and his officials and Senior Chinese Officials is dangerous and jeopardizes the ability of countries to fight the pandemic together. In this age of hyper information, it is important to think about the information you read and check its sources before you go on to support what could be misinformation.
Now back to the facts. Chinese officials claimed on March 12th that China had reached its peak of new coronavirus cases. Over a month later this seems to be the case, but it is important to note that the international community questions China’s claim of no new domestic cases and its overall transparency. Especially after China released an updated death total for Wuhan that showed an increase of deaths caused by COVID-19 by almost exactly 50%. The worst of the pandemic seems to be over for China as much of its workforce has returned to work and the rest of the world is looking to China for an idea of the economic impact. Chinese officials on Friday said that the world’s second-largest economy shrank 6.8 percent in the first quarter which is the first time China’s GDP has contracted in nearly five decades. The IMF expects the global economy to contract by 3% this year, but China is expected to grow by 1.2% in 2020 and 9.2% next year. Compared to the rest of the major economies of the world, China is set to recover from the pandemic better than ever and significantly shorten the gap between the U.S and China. China’s political outlook does not look as promising. The pandemic has starkly increased the decoupling of the U.S and Chinese economies that began with the trade war, and this is also true for some European nations like France and The U.K. The virus has even caused a divide among China and the African Union after reports of African’s living in China who were mistreated were released. For the first time in decades, African leaders expressed their displeasure with China openly instead of behind closed doors. Problems contained as China is refusing to match G-20 members in their calls to forgive loan payments or cancel debt all together for African nations. China is reluctant to do so as they are the world's largest lender to African nations, lending more than $150 billion and funding massive infrastructure works as a way to sucre access to the continent's natural resources and farmland. These issues are unlikely to persist though, as China will continue to support African nations significantly more than the rest of the world. Looking back on the latest information it seems that relative to the rest of the world China is set for a speedy and prosperous recovery as long as the coronavirus does not strike again.
Intergovernmental Organization. An IGO, often called an international organization, is an organization created by a group of international states, usually by treaty, that seeks to carry out an internationally recognized function or address an international problem that such states have not been able to do at a reasonable cost. IGO’s have proliferated especially after World War II, with prominent examples including the United Nations, the International Monetary Fund, and the World Health Organization. Each of these institutions features a broad roster of member nations, from democracies and developed nations, to autocracies and developing nations. Even amongst such a diverse group of peoples, it has been largely recognized that humanity faces certain problems that go beyond the purview and power of individual states, and thus requires international cooperation to effectively come to an effective solution. This does not mean that these organizations operate free from state interference, however. Due to the increasingly interconnected nature of the 21st-century world, more and more issues are seen as global, rather than national, causes, and therefore threatens the sovereignty of even the most powerful states.
WHO threatened with potential defunding. On April 14, 2020, President Trump announced plans to eliminate future funding for the World Health Organization, due to the laggard response by the WHO in declaring COVID-19 as a worldwide pandemic. Currently, the US is the largest contributor nation to the WHO, providing 17% of its budget. This gives it more influence than other nations in how the WHO responds to crises while forcing the WHO to operate in accordance with international legal and transparency standards. Unfortunately for the WHO, the political considerations of other nations, especially powerful ones such as China, make its response to the current pandemic difficult to carry out. The Chinese government has been notoriously difficult to work with in the past and refused to acquiesce to international health transparency standards until COVID-19 infection rates had skyrocketed and cases had been reported in other nations. China acts in this manner to ensure that discontent against the government and the Communist party does not form, as potential missteps by the party leadership in response to a public health emergency could seriously threaten the stability of the government. Unfortunately for the WHO, China has a history of making life difficult for organizations that offend its government, forcing it to hold off on criticizing the Chinese response, and even declare that unsanitary practices that are officially blamed for the beginning of the pandemic (such as exotic animal wet markets) could resume. The WHO will likely continue to be funded by the United States, as defunding them would result in further Chinese influence over the powerful organization, though President Trump’s announcement does bring awareness to the continued fallibility of IGO’s in the face of pressure from authoritarian governments (like Russia and China) who seek to challenge international democratic norms, such as transparency and openness.
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.