Rip Van Winkle

By Lori Zager & Lisa James

Rip Van Winkle fell asleep after ringing in the New Year in 2020. He woke up today and asked us for an update.

What happened while you were asleep?

We explained that there was a global pandemic that claimed almost 400,000 lives worldwide and more than 100,000 in the United States.

To prevent overwhelming the U.S. hospital system, various state, local, and federal governments shut down the economy in mid-March. Bars, restaurants, gyms, hair and nail salons, clothing and department stores, golf courses, and parks were closed.

Citizens were required to shelter in place and were asked to leave home only for essential needs such as grocery shopping and critical medical care.

Toilet paper, masks, and easily stored food became scarce commodities.

Brain surgeries to remove tumors were postponed. Air travel ground to a halt, and hotels emptied.

A wave of bankruptcies followed, including J.C. Penney, Hertz, Pier 1, Papyrus, Lucky’s Markets, J. Crew, Neiman Marcus, Le Pain Quotidien, Frontier Communications, Gold’s Gym, Intelsat, and Virgin Australia. Gap stopped paying rent on many of its stores.

In April, U.S. crude oil futures briefly turned negative, reaching an astonishing -$38 per barrel, as demand collapsed and storage capacity ran out.

Political and social upheaval

The U.S. presidential race featured two septuagenarians, both widely criticized for memory lapses and rhetorical confusion.

In Minneapolis, a Black man was arrested for allegedly passing a counterfeit $20 bill. While handcuffed and on the ground, a police officer knelt on his neck until he died, despite his repeated pleas that he could not breathe. Other officers did not intervene.

This incident triggered nationwide protests. Most were peaceful and many participants wore masks due to the pandemic, but there were also incidents of looting.

Downtown San Francisco and other major cities showed boarded-up storefronts and empty streets.

As of mid-May, 36.5 million Americans had filed for unemployment benefits in just eight weeks. Many of those jobs may never return.

Missing the Revolutionary War would have paled in comparison.

And yet… the stock market is near highs

We explained to Rip that despite:

• A deadly global pandemic
• A severe recession
• The fastest rise in unemployment in modern history
• Political uncertainty
• Civil unrest

…the stock market had recovered sharply and was approaching pre-pandemic highs.

Rip was incredulous.

Why is the stock market rallying?

We offered several explanations:

1. Liquidity

The Federal Reserve responded aggressively to the crisis by injecting trillions of dollars into the financial system. This stabilized markets and increased liquidity.

Congress also passed large-scale stimulus programs to support households and businesses.

2. Forward-looking markets

Markets anticipate the future rather than reflect the present. Investors began pricing in economic recovery and reopening, focusing on 2021 and beyond.

Historically, stock markets tend to bottom several months before recessions officially end.

3. “TINA” — There is no alternative

With bond yields near historic lows, traditional fixed income offered limited return potential.

Other asset classes, including real estate, also faced uncertainty due to job losses and structural shifts.

4. Negative interest rates globally

In some parts of the world, investors were effectively paying governments to hold their money. Compared to that, equities remained attractive.

5. Inflation expectations

Some economists argued that massive fiscal and monetary stimulus could eventually lead to inflation, weakening the long-term appeal of bonds and supporting equities.

Market reality: not everything is rallying

While the S&P 500 was near its highs, performance beneath the surface was highly uneven.

The index is heavily weighted toward large technology companies. As of early June, Microsoft, Apple, Amazon, Facebook, and Google represented roughly 20% of the S&P 500, and many of these stocks were near or above all-time highs.

Meanwhile:

• Energy stocks were down more than 30%
• Financials were down more than 20%
• Airlines, cruise lines, retail, restaurants, and travel companies remained deeply depressed

Rip asks for guidance

We directed Rip back to our first-quarter thinking:

“If history is our guide, equities may be the best choice in an uncertain and inflating world, with gold as a hedge against fiat currencies. We favor secular growers most often found in healthcare, technology, and communications. We also believe gold miners, in addition to the commodity itself, may be a prudent hedge.”

We also noted:

“As markets rebound, the hardest-hit sectors may recover the fastest initially, but over time, companies at the scene of the wreckage often underperform.”

A final warning

We continue to favor secular growth sectors such as healthcare, technology, and communications.

However, markets do not move in straight lines. A pullback would not be surprising.

The coronavirus has not been eradicated, and additional waves of infection remain a risk. Elections were approaching, and geopolitical tensions between the U.S. and China were rising again.

But it is not all bad.

Rip decided to go back to sleep and asked to be woken up in November so he could vote. He did not want to sleep through the election.

Wear a mask, stay safe, and enjoy those you cherish.