What The Heck And What Now?

Summary

• In the short run, it appears the worst is behind us.
• However, we are in the middle of a severe recession with tens of millions unemployed.
• Although Covid-19 has produced significant damage, don’t let fear and panic infect your long-term investment future.

The Covid-19 viral pandemic that hit our shores in early 2020 shut down the economy to a virtual halt, and unemployment has skyrocketed to an estimated 19%, as 30 million people have now filed for unemployment benefits over the last six weeks (see chart below). Shockingly, we have not seen joblessness levels this high since the Great Depression. All this destruction has investors asking themselves, “What the heck, and what now?

Forecasts for 2nd quarter economic activity (Gross Domestic Product) are estimating an unprecedented decline of -12% (see chart below) with some projections plummeting as low as -34%. Despite the dreadful freefall in the stock market during March, along with the pessimistic economic outlook, the major stock indexes came back with a vengeance during April. More specifically, the Dow Jones Industrial Average soared +2,428 points, or +11% for the month. The other major indexes, S&P 500 and NASDAQ, catapulted higher over the same period by +13% and +15%, respectively.

Source: The Atlanta Fed

Certainly, there have been some industries hurt by Covid-19 more than others. At the top of the misery list are travel related industries such as airlines, cruise lines, and hotels. Retailers like Neiman Marcus (NMG-OLD), Pier 1 (PIR), and J.C. Penney (JCP) are filing for bankruptcy or on the verge of closing. Restaurants have also been pummeled (partially offset by the ability to offer pickup and delivery services), and entertainment industries such as sporting arenas, concert venues, movie theaters, and theme parks have all painfully come to a screeching halt as well. Let’s not forget energy and oil companies, which are battling for their survival in an environment that has witnessed oil prices plunge from $61 per barrel at the beginning of the year to $19 per barrel today (with a brief period at negative -$37… yes, negative!) – click here for an explanation and see the chart below.

Source: Trading Economics

What the Heck?!

With all this horrifying economic data financially crippling millions of businesses and families coupled with an epidemic that has resulted in a U.S. death count surpassing 60,000, how in the heck can the stock market be up approximately +34% from the epidemic lows experienced just five short weeks ago?

I was optimistic in my Investing Caffeine post last month, but here are some more specific explanations that have contributed to the recent significant rebound in the stock market.

• Virus Curve Flattening: The wave of Covid-19 started in China and crashed all over Europe before landing in the U.S. Fortunately, as you can see from the chart below (U.S. = red line), social distancing and stay-at-home orders have slowed the growth in coronavirus deaths.

Source: Our World in Data via Calafia Beach Pundit

• Fiscal Stimulus: The government fire trucks are coming to the rescue and looking to extinguish the Covid fire by spraying trillions of stimulus and aid dollars to individuals, businesses, and governments. Most recently, Congress passed a $484 billion bill in stimulus funding, including $320 billion in additional funding for the wildly popular Payroll Protection Program (PPP), which is designed to quickly get money in the hands of small businesses, so employers can retain employees rather than fire them. This half trillion program adds to the $2 trillion package Congress approved last month.

• Monetary Stimulus: The Federal Reserve has pulled out another monetary bazooka with the announcement of $2.3 trillion in additional lending to small businesses. This action, coupled with the long menu of actions announced last month brings the total amount of stimulus dollars to well above $6 trillion (see also Recovering from the Coma for a list of Fed actions). You can see in the chart below how the Fed’s balance sheet has ballooned by approximately $3 trillion in recent months. The central bank is attempting to stimulate commerce by injecting dollars into the economy through financial asset purchases.

Source: Dr. Ed’s Blog

• Improving Healthcare System: Treatments for sick Covid patients has only gotten better, including new therapeutics like the drug remdesivir from Gilead Sciences Inc. (GILD). Dr. Anthony Fauci, the NIAID Director (National Institute of Allergy and Infectious Diseases) stated remdesivir “will be the standard of care.” With 76 vaccine candidates under development, there is also a strong probability researchers could discover a cure for Covid by 2021. With the help of the Defense Production Act (DPA), the government is also slowly relieving critical manufacturing bottlenecks in areas such as ventilators, PPE (Personal Protective Equipment) and Covid test kits. Making testing progress is crucial because this process is a vital component to reopening the economy (see chart below).

Source: Calculated Risk

• Economy Reopening: After I have completed all of Netflix, participated in dozens of Zoom Happy Hours, and stocked up on a year’s supply of toilet paper, I have become a little stir crazy like many Americans who are itching to return to normalcy. The government is doing its part by attempting a three-phase reopening of the economy as you can see from the table below. You can’t fall off the floor, so a rebound is almost guaranteed as states slowly reopen in phases.

What Now?!

In the short run, it appears the worst is behind us. Why do I say that? Covid deaths are declining; Congress is spending trillions of dollars to support the economy; the Federal Reserve has effectively cut interest rates to 0% and provided trillions of dollars to provide the economy a backstop; our healthcare preparedness has improved; and global economies (including ours) are in the process of reopening. What’s not to like?!

However, it’s not all rainbows, flowers, and unicorns. We are in the middle of a severe recession with tens of millions unemployed. The Covid-19 epidemic has created a generation of germaphobes who will be hesitant to dive back into old routines. And until a vaccine is found, fears of a resurgence of the virus during the Fall is a possibility, even if the masses and our healthcare system are much more prepared for that possibility.

As the world adjusts to a post-Covid 2.0 reality, I’m confident consumer spending will rebound, and pent-up demand will trigger a steady rise of economic demand. However, I am not whistling past the graveyard. I fully understand behavior and protocols will significantly change in a post-Covid 2.0 world, if not permanently, at least for a long period of time. Before the 9/11 terrorist attacks, nobody suspected air travelers would be required to remove shoes, take off belts, place laptops in bins, and carry tiny bottles of mouthwash and shampoo. Nevertheless, a much broader list of social distancing and safety codes of behaviors will be established, which could slow down the pace of the economic recovery.

Regardless of the recovery pace, over just a few short months, we have already placed our hands around the throat of the virus. There are bound to be future setbacks related to the pandemic. Physical and economic wounds will take time to heal. Turbulence will remain commonplace during these uncertain times, but volatility will create opportunities as the recovery continues to gain stronger footing. Although Covid-19 has produced significant damage, don’t let fear and panic infect your long-term investment future.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (May 1, 2020).

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD, Zoom, Netflix , and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in Neiman Marcus, Pier 1, and JCPenney or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Comments

[itzik1160]

Thanks for interesting article. Fiscal Stimulus and zero rates since 2008 is not a good long term strategy to deal with the COVID-19 crisis

[wald22]

Covid 19 = Corona 2019 model, which has been around way before it was discovered in 1930, but in 1930 a lot of people died from it, thus the discovery. The old Merk veterinary book has a lot about corona. It piggy backs shipping fever in animals, and now that the economy is ever more about transport of stuff, it piggy backs everything we transport. Everything that is being shipped is spreading the virus. But today's virus is not just corona it is corona with SARS spliced into it.

China got the same problem we had with the swine flu. It killed half of their pig population. China then imported female feeder pigs to rebuild its herd. Everyone of those pigs that went through Washington state to China died from shipping fever and the corona that piggy backed shipping fever. Once in China they went trough an auction barn and were moved to a number of people in the pig raising business. All of these pigs came right back to the auction barn and were resold because they were sick and the owners tried to recoup whatever they could. Most of those pigs were then slaughtered, even though they were not of slaughter seize. Many of them went to the wet market and slaughtered out in the open. This is how this all got started.

Party officials freaked out, tried to hide what happened for it would be a bad mark on China. They took what they learned from their past SARS problem and the information given to them by Harvard educated (proffessionals) idiots they had on their payroll. The idea being to treat corona with SARS medication by putting SARS into corona. This turned into a real disaster they have to cover up. It was one of the most stupid-iest thing ever done. The problem is it can't be undone.

The corona death rate has averaged 2.6% of all flu deaths since 1930. 2020 is a little higher because of the weather and air pollution enables the corona/SARS combination to spread faster and more widespread. Also shitty conditions and humidity (wetness) enables it to spread faster and more widespread.

Monetary Stimulus = The FED is member bank owned, and its purpose id to do everything possible to at least keep the value of debt, and if possible even increase it, for it is the bread and butter of the banking industry. Our debt is their asset.

Improving health care = Drain the sick people of whatever they have with costly procedures. If a piano falls on your head and you die from it, it is in the hospitals interest to have you listed as death by corona. We could cut the death rate of corona by simply doing with what we are doing with cattle and pigs. Give them better immunity by giving them Vitamin D shots, zinc and selenium. It works, I have used the cow medication on myself and because of it I am still vertical. If one wants to be in horizontal position just keep eating our junk food and stay inside where the sun can't shine on you. If allowed cattle will do everything possible to get as much sunshine as possible, because it kills corona, but SARS is a different animal. What we have now is a different, = SARS combined with corona. We either find a vaccine or most of us will get it and be self vaccinated as in herd vaccination. It will take two to three years. In the cattle business there is an 8 way vaccine that would work on humans, but nothing is 100%. Just because one gets the flu shot every year does not mean you will not get the flu.

What now = There is a need for civility. Debate without acting out or tweeting bullshit like Trump does. Banks use paper gold as a means to enhance the fraud on fiat credit lending, where credit has replaced our supply of money. Paper gold is the tool our banksters use to enslave humanity. China has the very same problem. 70%+ of the Chinese exports is made possible by our multinational corporations. We should not be blaming China for a problem we ourselves have created. We should be paying people to become self employed in self sufficiency. It now all comes down to doing it now or later when there is no other option. Trump is going to do everything possible to destroy this country, just like he has with his own companies. The only thing that keeps Trump afloat is the gold he inherited. Funny thing is that Mitch Mc Connell is that he has helped Trump to inflict damage on the American people. We are in a period much like it was in England during the upstairs downstairs time period. Things have to get so bad the the upstairs people lose everything before real change can take place. We are now entering that period.

[dwaymer]

No, the worst is not behind us. Unemployment still climbing. No, deaths are not on the decline. New daily death record on Friday.

[Jeremy Robson]

I think that now (after the rally) is the ideal time for fear and panic. This virus battle, as the Swedes keep telling us, is a marathon not a sprint and they are right. Th rest is just hopium.