It has been a positive week for equity markets, with the S&P500 advancing approximately 9.4% in the last five trading sessions. Speculation abounds, ranging from expectations of a shorter than expected recession and bear market to what one hedge fund manager called a “true crash”. Our advice: ignore it all.
It is useful to remember what we have mentioned before about equity prices. The price of any stock, and therefore of the entire equity market, is not based upon investors’ perceptions of the current value of companies. The price is based upon investors’ assumptions about the future value of companies. At times, this can be quite counter-intuitive. For example, a Wall Street Journal headline this morning reads: “U.S. Jobless Claims Totaled 6.6 million Last week”, and it goes on to say: “A record 7.5 million Americans were receiving unemployment benefits at the end of March as the coronavirus pandemic continued to hit the U.S. job market.” It would be rational to assume that this reality should translate into negative equity market returns. Yet, the S&P500 was up 1.45% today. Why? Because this news was expected, and the market is optimistic about the future.
We suggest a more cautious optimism. Analogies are generally used to make the confusing more understandable. PIM clients are extremely bright people who don’t require over-simplification. Yet, we can all appreciate some context. Think of recent equity market performance the way you have learned to understand Spring in the great Pacific Northwest. Many months of dark, cold days can produce lethargy (especially if you aren’t originally from around here). Then, finally, the sun comes out, temperatures rise, and the beautiful blue sky presents itself for several days in a row. And just when you think you’re out of the woods, it snows, or we revert back to dark cloud-cover and cold rain. The lesson: don’t be fooled by short bouts of sunshine when the worst of the season isn’t yet over.
The path of the recovery will be dependent on how the US consumer responds once shelter in place policies can be removed. A recent survey found that 73% of Americans have already seen the outbreak depress their incomes; twenty-four percent stated “very significantly”. The wounds the virus has left will take time to heal. It’s difficult to imagine everyone in the country returning to their normal spending habits quickly. Until a vaccine is developed individuals will remain cautious to some degree. Consumers will be more careful with their spending; savings rates will increase, and growth will remain low.
In our March 25thspecial communication, we suggested that the recovery will take 12-18 months. That timeframe still appears to be realistic. We don’t believe the argument that a rapid recovery will occur this calendar year; not impossible, but not our base case. The economic wounds may be too deep and, as we have presented, the economy was modestly slowing before the crisis hit.
We do not wish to present an overly pessimistic viewpoint. But we are conservative in our expectations for the timing and duration of the recovery.
We’d like to close today’s note with a very clever idea shared with us by a family of long-time PIM clients. In addition to supporting local food establishments, they have expanded their outreach by purchasing gift cards to privately-owned small businesses. They are providing cash flow to the businesses today and will use the gift
cards when quarantine restrictions are lifted. They are supporting privately-owned bookstores in particular. We thought this was such a wonderful idea that we wanted to pass it along.
Be well everyone. If you have any questions, please let us know.
Personal Investment Management, Inc.