This commentary touches on the following subjects.:
- Reopening the Economy
- C19 Infections, Hospitalizations, Deaths
- Vaccine Development
- Monetary Policy and Fiscal Stimulus
- The Bifurcated Stock Market
It has been 84 days since the U.S. stock market started the C19 market sell-off. During that time a great deal of new information has come forth to help us deal with the challenge the virus represents. There is no perfect government response w hen it comes to matters of personal health. Ideally, we can use the information we have collected for the greatest good, while continuing to protect those at risk.
Reopening the Economy
As individual states, counties and cities announce their reopening plans we are getting a sense of the varying approaches to addressing health and economic concerns. As pressure mounts economically, and as evidence for the ability to safely return to work and other life activity builds, we should see economic activity pickup. For the time being the emphasis is on a slow and cautious reopening. Ideally the narrative will shift to safe ways to open more of the economy while protecting those most at risk
C19 Infections, Hospitalizations, Deaths
It should be abundantly clear that C19 is not going anywhere; we can count on more headlines of hot spots, total infections, and rising deaths. We are still learning about the full impact of the C19 virus but there have been reports which suggest hospitalizations and deaths are predominantly occurring in those over 65 with a compromised heath condition, Much of the public is terrified of the health risk even though some data suggests healthy individuals under age 65 may have little risk of hospitalization or death.
Reopening the economy may not be enough. We will need people to engage the economy. If valid data exists which suggest a large part of the working population is at little risk of hospitalization or death from C19, that information should be used to encourage economic recovery. Of course the trade-off is the heightened risk of infection to “at risk” family members or loved ones. I think we all acknowledge it is an incredibly difficult area to navigate
Vaccine development is proceeding at an unprecedented rate with several promising candidates emerging, but a lot of work remains. If the solution to reopening the economy relies on the availability of a vaccine, it is going to be a long time before we can resume our pre-C19 lifestyles. Not only are vaccines notoriously difficult to develop, testing them requires time.
Monetary Policy and Fiscal Stimulus
Negative interest rates may be coming to a bank near you. Despite Fed Chairman Powell’s vocal opposition to negative interest rates policy (NIRP), the futures market is pricing negative rates hitting the U.S. in early 2021. This is a signal by the bond market that the economic environment is going to get worse before it get better.
In terms of fiscal stimulus, congressional discussions remain far apart for a new injection of money to the economy. While cash needs exist the cost is enormous. It also points out the stresses state and local governments are feeling as they plead for more money (they already received some funds in the first stimulus round).
The Bifurcated Stock Market
Investors now have nearly three months of stock market behavior since the market top in late February. While a late second half 2020 economic recovery may be our best hope on the current path, what has materialized could not be any clearer. I have never seen stock index divergences like these below.
Year-to-date the performance difference between the Nasdaq 100 ETF and the S&P 500 ETF is 15% (20% for the Dow Jones Industrial ETF)! The Nasdaq 100 is the only major index with positive gain, YTD (4.7%) as of May 12 th . The difference is even larger when you compare growth versus value investments. The Morningstar U.S. Large Cap Growth is up 2.9% YTD while the Invesco S&P 500 Pure Value ETF is down -37.1% YTD (ETFReplay, May 12 th , 2020). It is a similar scenario for international stocks with the Vanguard Developed Markets down -19.3% and the Vanguard Emerging Markets down -18.4% (ETFReplay.com, May 12 th , 2020).
Technology, healthcare, and innovation continue to be part of the economy performing very well; a scenario that could play out much longer as we work through what may result in long-term structural changes. These are all investments areas were we are very familiar and active at Dightman Capital. Let us know if you would like us to share some of our ideas with you.
With earnings season slowing down next week the market will turn to other news sources, which unless they brighten, could put more pricing pressure on stocks. There are also many factors that could propel the market higher like passage of a new stimulus bill, U.S. companies announcing plans to return manufacturing jobs to the U.S., vaccine progress, and helpful data on the impact on the virus, but with each passing week the damage to the economy mounts. Regardless, eventually we will put the C19 virus behind us. In the meantime, we need to focus on protecting our health and investments.