By: Stash Graham
The equity markets, fueled by created and tax-payer money from the Federal Reserve and Capitol Hill respectfully, produced strong returns for April. The Federal Reserve’s historic money printing has given a strong tailwind to equity prices in the face of institutional money like hedge funds being net short the market. Additionally, the 3rd stimulus package from Capitol Hill provided a safety net to the 30 million unemployed Americans who have applied for employment benefits over the last 6 weeks. The unemployment rate is projected to be north of 10% for at least a year. Interestingly, in the face of strong market performance, interest rates across the yield curve continue to decline, although the decline in April was less than the first three months of the year. Gold continued its strong performance throughout the year and is up approximately 12% year-to-date.
We highlighted in the past how important the consumer is to the economy. If the economy is going to get the ideal “V-shape” recovery, the consumer must lead the charge. Over the last couple of weeks, we are starting to see the consumer reaction to the pandemic. March retail sales figure posted their worst decline on record. We believe the numbers were slightly understated by technicalities and that April retail sales figures will be even worse. The Census Bureau detailed irregular March results due to businesses ceasing operations. The report said “Many businesses are operating in a limited capacity or have ceased operations completely. As a result, their ability to provide accurate, timely information to Census may be limited.” Considering that we now have all 3 months of retail sales figures now, we can assume that the initial 1st quarter GDP contraction of -4.8% is probably accurate. This 1st quarter figure was worse than consensus expectations at -4%. Of even greater concern is Bloomberg Economics, the most accurate of the major economic teams for 1st quarter GDP estimates, projection of a mind-numbing -37% decline in GDP for the 2nd quarter. With all of this being the said, markets are looking past the next 2 months and focusing on the Fall.
An economic report from the Federal Reverse Bank of San Francisco titled, “Longer-run Economic Consequences of Pandemics” discussed what is likely to happen in the future. The report covers the economic ramifications of pandemics dating back to the 14th century. The results of the report imply that a lower natural rate of interest will last for a while. This period of low-interest rates should benefit all interest-sensitive sectors like real estate and utilities and, A low return to assets should be expected for a while. This will make sectors like banking a tough sector to invest in.
In a separate piece by the Federal Reserve Bank of New York titled, “How the Fed Managed the Treasury Yield Curve in the 1940s,” details how the central bank decided to peg interest rates to the back of the entire curve limiting any movements higher. In total, we have two separate publications from different regional Federal Reserve banks detailing the same observations as a result of varying, yet somewhat interrelated, events: Pandemics and Severe Recessions.
Earnings season got started a couple of weeks ago and the results have been predictable. Most S&P 500 companies have pulled guidance for the remainder of the year. The corporate leadership teams provided early commentary about what they expect to see. Goldman Sachs CEO, David Solomon, was quoted as saying, “You have to view something that is a slower economic recovery as you come out of this. And look, even if you look at the Goldman Sachs scenario of a very steep decline with a sharp increase in the second and third quarter, they are still only predicting a 50% recovery of the output that was lost.” Another representative from the automotive sector, CarMax CFO Enrique Mayor-Mora said it’s not clear when business-as-usual will occur: Consumer confidence is “taking a hit with so many unemployed folks. So it’s really hard to understand what the demand is going to be”. Kenny Rocker, Executive Vice President of Union Pacific, a leading rail transportation company in the United States, said: “Further weakness was driven by pandemic-related supply chain disruption that began in China and has slowly impacted much of Asia. Looking ahead, there remains quite a bit of uncertainty surrounding this global pandemic that we are facing. With the freefall of economic indicators over the past few weeks and uncertainty about when we will see the COVID-19 pandemic curve start to flatten out, an accurate assessment of 2020 is hard to pinpoint at this time.”
Gold– Monetary debasement by the world’s central banks is reaching historic peaks. Extra-low interest rates continue to persist and are expected to stay for some time in the future. Central banks around the world focus on inflationary policies with the hope that we start to see it. If we do start to see inflation, Gold should be a major beneficiary. We have not added to the position yet. We are looking for better value, but the next couple of years should be good for the precious metal. The gross debt-to-GDP is projected to be 107% as we get to the end of this virus-induced recession. We forecast additional fiscal expansion plans in the near-term and, as a result, these leverage ratios are expected to increase as we progress through the next decade.
Sectors for possible investment in the future- We have mentioned regulated utilities, specialized REITs (single-family homes and multifamily), and well-capitalized telecom companies. Additionally, we are watching, high-grade corporate bonds (A- or higher) or Municipal bonds with insurance. Senate Majority Leader Mitch McConnell recently indicated that the Federal Government will not support State governments. We believe certain states are well guarded against any default risk, however, municipal bonds with insurance provide additional comfort. Lastly, higher on the risk platform, as people work and operate from home, we could see a small portion of society that maintains this lifestyle. Video streaming and home-office technologies have all shot up in price over the last few weeks. The value in this space is not good right now. We need to see which companies can gain market share and maintain this growth over the intermediate-term and into the future. We continue to appreciate your trust during these volatile and unsettling times. We must maintain patience and discipline during these irrational periods. Watching this rally can be frustrating but projecting economic activity for the remainder of the year or into 2021 is highly questionable. The National Bureau of Economic Research is estimating that 8% of the labor force has retired already during the virus-induced Recession and is not coming back. Having a smaller labor force limits the ceiling of the economic output that our normalized economy can produce in 2021. A smaller workforce also limits how many total wages can be earned to be spent later buying consumer goods. We continue to work for you every day with an eye on protecting your estate’s assets.
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