June 11, 2020
Rip Van Winkle1 fell asleep after ringing in the New Year in 2020.  He woke up today and asked us for an update.  
BY lori Zager & lisa James
We explained there was a global pandemic that had 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 U.S. economy in mid-March, closing bars, restaurants, gyms, hair and nail salons, clothing and department stores, golf courses, and parks. Citizens were required to shelter in place and asked to only leave their homes for essential services like 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.  

J.C. Penny, Hertz, Pier1, Papyrus, Lucky’s Markets, J Crew, Neiman Marcus, Le Pain Quotidien, Frontier Communications, Gold’s Gym, Intelstat and Virgin Australia filed for bankruptcy. Gap quit paying rent on its stores.  

In April, U.S. crude oil futures hit a shocking minus $38 as demand for oil plummeted and there was nowhere to store the excess supply. 

The U.S. Presidential race looks like it will be a competition between two septuagenarians, both of whom have memory issues. One can’t remember any negative event he was responsible for, and the other can’t remember the question he’s just been asked.  

A black man was arrested in Minneapolis for passing a counterfeit $20 bill. Although he was already handcuffed and on the ground, a police officer kneeled on his neck and pinned him down. Despite the man’s pleas that he could not breathe and bystanders screaming to get off his neck, the officer didn’t move until the man was dead, and his police counterparts did nothing to interfere.  

The U.S.has erupted in protests nationwide. Most are peaceful, with many protesters clad in masks due to pandemic concerns. There have been many incidents of looting. Downtown San Francisco and other American cities look like a war zone, with boarded up storefronts and empty streets.

As of May 15th, during the past eight weeks, 36.5 million people filed for jobless benefits in the U.S. Many of those jobs may never return.

Missing the Revolutionary War pales by comparison.
We delivered the fillip to Rip Van Winkle. The stock market is close to its pre-pandemic highs. Deadly virus, severe recession, steepest increase in unemployment in history, election uncertainty and civil unrest. No problem! 

Rip was incredulous and we offered several explanations for why the stock market is rallying despite the blood (literally) on the streets.

Why is the stock market rallying?
  • Liquidity (the amount of money readily available for investment and spending). The Federal Reserve, faced with dysfunctional markets, an economy brought to a standstill, and impending massive unemployment, reacted with alacrity and injected trillions of dollars into the U.S. monetary system. By increasing liquidity, the FED quickly stabilized financial markets and ultimately encourages future investment. Further, Congress authorized trillions of dollars in various programs to help citizens and companies pay their bills and manage through the economic morass.
  • Anticipating the end of the recession. Markets are forward looking. Given the massive government stimulus and current reopening of economies, investors are willing to overlook 2020 and focus on growth in 2021. Stocks historically bottom about 4 months before a recession ends.
  • TINA. There is no alternative. Bond yields are at historic lows. Joblessness has called rental real estate cash flows into question, and the work-from-home economy is similarly problematic for commercial real estate.
  • Negative interest rates. In some parts of the world, governments are being paid by investors to borrow money. It’s not hard to compete with less than zero.
  • Inflation. Wharton Professor Jeremy Siegel recently suggested that the 40-year bond bull market is over. Although the FED virtually promised that rates would remain low for a prolonged period, a pickup in inflation may quash the bond market’s winning streak. He sees inflation rates rising continuously over the next several years. Professor Siegel says the stock market’s recent performance is sniffing out increasing inflation.
Despite the S&P 500 closing in on recent February highs, not all stocks have performed well this year. The S&P 500 is a market cap weighted index, meaning the largest companies have the most weight and influence on the index as a whole. As of the beginning of June, the top stocks in the S&P500 were Microsoft, Apple, Amazon, Facebook and Google, representing fully 20% of the index. These top stocks are now close to or above their highs. Meanwhile, the energy sector is down over 30%, and the financial sector is down over 20%. Airline, cruise line, retail, restaurant and travel companies are similarly damaged. 

Rip wanted to know our thoughts, so we directed him to our first quarter letter.

‘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 as a hedge would be prudent.’ We went on to suggest, ‘As markets rebound, the hardest hit sectors may shoot up the most, but as time goes on, the stocks at the scene of the wreckage typically underperform.’   

We continue to favor secular growers most often found in healthcare, technology and communications, but should caution –markets don’t go up in a straight line. We wouldn’t be surprised to see a pullback. The coronavirus has not been cured, and health experts are expecting another wave of infections and loss of life in the fall. Elections are looming in November, and China and the U.S.are squabbling once again.

And finally, call us Pollyanna2,but it isn’t all bad.
Rip decided to go back to sleep. He asked us to wake him in November so he can vote. He doesn’t want to sleep through this election! 

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

1. Rip Van Winkle, the central character in a short story by Washington Irving, falls asleep and wakes up 20 years later having missed the American Revolution.
2. Pollyanna is the unfailingly optimistic title character in a number of Eleanor Porter stories.

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