The economy continues to rebound, but the rebound is far from evenly distributed and has been thrown more in doubt by the huge surge in COVID 19 cases the last month and less in doubt by the news that the trials of Moderna’s vaccine produced very strong results in testing and appears to be quite effective at getting the body to produce antibodies against the COVID 19 virus.
Industrial production has had the roughest time rebounding as witness the following chart.
Believe it or not, industrial production did not dip as low as 2009 and the pace of recovery is much faster, but it is very unlikely to continue at the present pace for very long and I expect that super-skinny V to widen out a good bit. If you are fortunate it will take less than the six years it took last time, but it would surprise me if took less than thee years and if the last bit of recovery doesn’t prove to be stubborn.
Consumer spending, which is as you have probably heard 100 times, is 2/3 of the economy, is rebounding very nicely. It may not surprise you to learn that online purchases are actually higher than at the start of 2020. In-store purchases, represented by the code “card present” in the second chart below, are more than halfway back already, though tailing off a bit with the resurgence in COVID cases.
Jobs are necessary for spending and production to increase for more than a blip. There the news is not as positive in terms of recovery. Jobless claims are definitely going in the right direction but are not even close to halfway recovered like we are seeing with spending.
If that seems odd, recall that 60% of those laid off are receiving more in stimulus checks than they were getting in wages. It appears that Rep. Pelosi is firmly committed to continuing that in a new aid package being considered and while the White House is apparently opposed, my guess is that Congress will prevail again. It should not surprise anyone if while providing welcome relief to those who do not have jobs to go back to, it is a drag on the pace of people returning to work. I’ll let you debate the merits of that over the dinner table.
Consumer Real Estate
On the other hand, there is trouble in residential income real estate. This chart of the confidence renters have in terms of making their rent payments is pretty alarming. I’m not sure whether to be more concerned for the renters, the landlords or the holders of residential mortgage paper. Remember that is not necessarily banks, because banks typically make the loan, take the fees, and sell their mortgages in packages. If your bank still holds your mortgage, that is fairly unusual these days.
This is the other shoe in terms of the economic impact of COVID policies. I don’t have a chart on personal bankruptcies, but I do for corporate bankruptcies and it is not pretty, basically on par
with 2009. Bankruptcies should be to some extent a trailing indicator and I think you should expect this number to continue upward, surpassing the number seen in the 2008-2009 recession. It just takes time for businesses to throw in the towel and it we keep getting reports of retailers closing down all their stores, whether it is Pier 21, Penny’s or Macy’s. The decline of the shopping mall, especially those that are not upper end in terms of tenants will accelerate as a tremendous amount of anchor tenant space become vacant hulks.
Outlook for the Economy
The outlook for continued recovery depends greatly on the control of COVID 19. That depends a lot on quarantining, wearing masks, avoiding contact with those most at risk, whether or not school’s resume in-person instruction and how many people are vaccinated when the vaccine becomes available.
Here is the percentage of people wearing masks in public from June 29 to July 5. It has likely ticked up some and with more corporations requiring it, will likely increase some more. At this point, it does seem that the Administration is open to a national requirement.
Now, if no more than half the population is wearing masks now, what do you suppose the vaccination rate will be? It will depend a lot on who is president in January, how many corporations require vaccines for their employees and how many parents vaccinate their children. My guess is that in the first six months, no more than 60% will be vaccinated and it will not surprise me if that proves to be optimistic. Eventually, it may be closer to 75% but I have my doubts about that. That likely means that COVID is a factor longer than many people are hoping for and to the extent that is true, the recovery will take longer as well.
As I mentioned last time, my clients have generally done well in the face of the biggest economic blow since the Great Recession. Most are somewhere between -5% and +5% for the year to date, with the higher end generally represented by my more aggressive clients for which we bought more individual stocks when they were low in late March and early April.
Our bond funds have disappointed me, with most slightly under water for the year to date because they have been light on government securities which is the portion of the bond market to show the best returns by far. But, with U.S. Treasury rates at the rate of inflation or below, who can blame them? I certainly don’t want to chase government bonds now so we will stick with our funds that have very good long term records, though of course past results are not guarantees of future returns.
The past few months show why I think it is important to diversify, especially when it comes to income investments. Blackstone is our largest real estate holding and it is down only slightly on the year and its worst month was not bad at all, especially compared to high yield bonds or stocks.
Accredited investors, those with at least $1 million in liquid net worth and with sufficiently large accounts with me to be able to reasonably invest in Strategic Wireless Infrastructure Fund did not see a drop at all. That continues to be one of the investments I am most pleased with.
Those in the Blackstone GSO Secured Lending Fund have seen a slight drop in price but all of the loans in the portfolio are current in their payments so the drop is strictly tied to market pricing. Since the loans are expected to be held to maturity and to generally be paid off within three years, I am not at all worried about short term pricing swings.
Here is a year-to-date map of the stocks in the S&P 500 index. The size of the blocks represents the relative sizes and weights of the companies in the index. Gee, anything jump out at you?
Yes, Amazon, Apple, Microsoft, Google and Facebook dominate the index, both in terms of size and performance. If you look closely, you can see the larger sections for the industries like tech and health care and you can see that the best places to be this year have been tech, health care and retailers with a large online presence or involved in home and garden.
Here’s another way to look at it. Again, the conclusion should be obvious as to which parts of the U.S. stock market are doing best. I have used the Morningstar Style Box format and filled it in and colored it with returns from several Russell indexes to illustrate returns. These are YTD returns through July 15, 2020. Data is from Morningstar.
Since the five big growth stocks dominate the large cap growth category and spill slightly into the midcap growth box, you can see how this correlates with the map of the market I showed above.
My investment strategy obviously varies by client. For conservative investors, it is a time not to panic. The worst thing to do earlier this year when stocks and bonds were down was to sell out. I still believe that it is generally better to ride out most market swings and that when things are dropping quickly is nearly always the wrong time to be selling. Diversification is usually your friend and timing is usually your enemy.
For moderate and growth-oriented investors, there are still discounts on good companies but the easy money has been made. Some of the hottest stocks in the recovery have seen some profit-taking lately. Market leaders are still leading but their valuations are getting pretty pricey. Whether they will get even more pricey is hard to say.
The gap between pricing on what many people call value stocks and the fastest growing companies is at historic levels. That will of course correct but the timing is extremely difficult to get right. Market trends can go far past what a level-headed investor might consider reasonable.
For my part, I like to stick with what’s working until the trend turns, so I generally continue to emphasize large and midcap growth stocks with some weighting in large cap core as represented by the S&P 500 Index, though that is obviously being dragged over toward the large cap growth category by the outperformance of the most heavily weighted stocks in the index being large growth stocks.
As always, let me know if you have any questions, concerns or if your financial or life circumstances have changed significantly.
Thanks to Liz Ann Sonders, Chief Market Strategist at Charles Schwab, for her amazing twitter feed which is the source for every chart here other than the map of the market and the style box chart. Also note that mention of any specific investment does not constitute a solicitation to buy it.