Advisor Talking Points: Cautious Reopening Is Key To Economic Recovery
For Financial Advisors
What A Month
After a historic drop in March, stocks soared in April. The S&P 500 Index added 12.7% in April for the best month for the stock market since January 1987 and the best April since 1938.
Who could have guessed these would be the headlines on CNBC last Friday, May 1, 2020:
“S&P 500 BEST MONTH SINCE JAN. 1987.”
“NASDAQ BEST MONTH SINCE JUNE 2000.”
“DOW’S BEST MONTH SINCE OCT. 2002.”
As of Friday, May 1, 2020, the S&P 500 Index has rebounded 26.5% off its March 23rd low, though it still remains 16% below its Feb. 19th peak.
Year-to date the S&P 500 Index is down 12%.
The stock market today is just 3% down for the past 12 months.
Bottom Line: Given the near-complete shutdown of the U.S. economy, only being down 12% year-to-date is a minor correction in the stock market.
Stocks Often Rebound Before The Economy Does
It is hard to understand how the stock market can be outperforming when unemployment is going up, corporate earnings are temporarily shrinking, and we’re almost certainly in a technical recession—even if it has been caused by a pandemic and politicians closing down the economy.
Here is the reason for the stock market gains: investors are forward-looking, and they are buying in advance of — and in anticipation of — better days ahead. That’s one explanation for the market’s 26.5% rebound rally last month.
This is a comforting concept when we are in the middle of a historic pandemic.
Stock market history confirms this future-oriented investor behavior. Since 1953, with one exception, the S&P 500 stock index has bottomed (or hit a low) anywhere from 3-to-11 months prior to the end of a recession, according to the Conference Board’s leading economic indicators. On average, the market bottomed four months before the end of a recession. Stocks rose nearly 25%, on average, from the market low to the end of the recession.
Because stocks are priced on expectations of companies’ future earnings and profit streams, investors care less about yesterday and more about the post-crisis era and what is to come in the next six, 12, or even 20 months. When news for companies and their workers is horrible and, as a result, stock prices severely decline, it’s usually a good investment bet to assume both the news and business conditions can only get better.
The second thing investors need to remember is that when pricing in future market conditions, investors at first focus on any signs — even small ones — of change. They’re willing to buy on any evidence of emerging signs of improvement. They don’t need to see GDP go from -5% to +1%, or first-time unemployment claims go from 3.4 million per week to 250,000, before they buy.
As an example, when markets began to turn around in the recessions of 2002 and 2009, investors observed that the economy was contracting less slowly and that at some point in the future, it would begin to expand again.
That’s the point. Stocks start to rise when economic and market data suggest things are getting less bad. Things don’t have to be great. If investors wait to buy long after the stock market bottom is over, they will miss the rebound.
As America Reopens: We Are In Uncharted Territory Here!
Americans are going stir crazy, and they want to see the lockdown end!
Thousands of New Yorkers poured into Central Park over this spring weekend. Thousands came out on the National Mall in Washington, D.C., and people protested the closing of beaches in California.
I don’t think there is any doubt that Americans want to go back to a more normal way of life and that there is enormous pent-up demand.
But until there is a vaccine, no matter what politicians do or say,
Americans will only go back to those reopened businesses,
shops and events if they can feel safe and where they feel there is a
very low likelihood of catching COVID-19.
According to a recent national poll, less than half of Americans say they are ready to engage in activities they are not sure are safe.
For example, most Americans showed some hesitation when it came to sending children back to school, going to a concert, or even riding public transportation.
But there are many activities that the majority of Americans say they would likely participate in, many of which are more personal or have a smaller economic impact.
- Most said if restrictions were lifted on the advice of public health officials, they probably would send their child back to school.
- A combined 54% probably or definitely would not ride public transportation, while 57% wouldn’t fly on an airplane.
- And the least likely event for Americans to attend? A combined 60% of Americans probably or definitely would not join tens of thousands of other people for a stadium concert.
- This survey comes as many states are beginning to allow restaurants to serve customers in their buildings and some other businesses to open with social distancing guidelines.
- The survey shows that Americans are more willing to engage in activities that deal with one’s social life. But with events like sporting events, weddings, movies, airplane trips, and concerts, it’s not clear that most Americans are comfortable attending these places.
- But the survey found that most are OK about attending smaller, more intimate gatherings.
- A combined 57% of Americans said they definitely or probably would go to dinner at a friend’s house, and would get a haircut.
- A combined 50% of Americans definitely or probably would attend a funeral or a religious service if there was some social distancing.
- The same is true for restaurants. If the restaurant can make them feel safe, Americans are looking forward to returning to restaurants and coffee shops.
Just Like 9/11, There Will Be Permanent Changes.
When the U.S. economy finally fully reopens, chances are it won’t look the same as it did only a few months ago before the coronavirus outbreak.
Until we have a vaccine, the world we are going to live in for the next two to three years will be totally different.
Psychologists predict the lockdown has made us all a little more cautious, and we will probably spend less and save more, and we will have fewer contacts with other individuals. We are going to be suspicious about things, like whether people we are meeting have the virus and will we have any future lockdowns again.
For large corporations, business executives say the pandemic will accelerate the trend away from dependence on global supply chains. That may make the U.S. economy more self-reliant and bring home some jobs, but it will also impose new costs on businesses and higher prices on consumers. But at least more things will be made in America by Americans.
For decades, shifting production to lower-paid workers overseas kept American consumer prices lower and helped offset the small growth in real wages and salaries.
Another major limitation of reopening the economy will be child care. Parents can’t go back to work if schools and daycares aren’t open. Many educational facilities have already proactively canceled through June, if not longer. With all schools making independent decisions on reopening, it’s nearly impossible to have a coordinated effort in the near term that’s not on a case-by-case, employee-by-employee basis.
Health And Safety Issues Will Be Very Disruptive For Small Businesses
In the near future, adapting to new considerations and guidelines on health and safety, particularly social distancing, may be the most disruptive and urgent task for many businesses—especially small retail businesses.
Restaurants, bars, hotels, and entertainment venues like theaters and sporting arenas were among the earliest to close, accounting for many of the 26 million unemployed last month.
Group meetings and conventions are going to be changed forever. Corporations are going to be cutting their travel budgets.
The number of salespeople on the road is going to be reduced. Executives are going to say, “Wait, do we really need to send all those people?”
Less travel may appeal to workers, especially those who have adjusted to child care and other aspects of their lives as a result of working from home for several months. But it’s lost business for airlines, hotels, car rental companies, and related industries.
Concerning leisure travel, there probably is some pent-up demand, but people are not going to travel until they feel safe.
It may be instructive to remember that after the terrorist attacks of Sept. 11, 2001, it took three years for airline traffic to return to earlier levels.
Large Public Events:
It will be even more tricky to manage large public events in sports stadiums and music concerts. Again, will people feel safe?
Movie theaters have the same problem. They are planning to space out reserved seating and reduce clustering by staggering movie start and end times.
Unfortunately, movie theaters may go the way of malls and old drive-in theaters. Movie-going was trending down before the pandemic. Now many people have become more accustomed to entertaining themselves at home on their oversized HDTVs via cable and streaming. People are even reading more books.
Working From Home:
Over the past two months of widespread telecommuting, companies and individuals have learned that a lot can be done effectively over the internet.
There also may be a permanently reduced demand for oil if many workers continue to work from home after the pandemic passes.
Many businesses are considering letting employees work from home remotely on Fridays. Multiply that by everyone in the country, that’s a lot of people not driving to work.
Advances in information technology revolutionized where and how products are made, as well as how they’re transported and distributed — and that will not change with the pandemic.
For decades, multinational firms relentlessly sought to raise profits by searching the world for cheap materials and producing goods in the cheapest, most efficient manner.
That commonly meant sourcing goods from Asian suppliers and producing on a just-in-time basis to keep just enough inventory on hand and squeeze as much efficiency and profit out of the system.
More than a quarter of American companies operating in China said they planned to shift sourcing of materials or supplies because of the pandemic, in some cases moving them outside China, according to a March survey released Friday by the American Chamber of Commerce in Shanghai.
China has long been the dominant and low-cost link in global manufacturing and trade, and any significant shift away from there will cut into the profits and raise prices for both retailers and consumers.
IBM, which has begun adding back workers in several locations in China and South Korea, has developed global standards for returning to the office. They include bringing back those who need access to on-site equipment or labs first, staggering arrival times so elevators don’t become too crowded, eliminating buffets and shared serving tools in cafeterias, and taking out furniture in other spaces to ease social distancing concerns in conference rooms.
In the future, many companies will start distributing face masks, screening for symptoms, closing on-site gyms, limiting seating in cafes, and offering disposable plastic covers for shared keyboards. Many companies have already learned that adding more frequent and visible cleaning during the day, rather than the traditional night or weekend service, has helped on-site employees feel more comfortable.
Companies are also likely to adopt changes like seating that may be roped off or removed from conference rooms to cut occupancy in half. Doors may be taken off hinges or propped open so employees can avoid touching handles. Signs are likely to point people in one-way traffic flows through hallways to help employees avoid passing each other close by — even if that means taking the long way to the bathroom. We may also see foot-pulls added to the bottom of doors for hands-free access and developing hand signs or space markers for co-workers to remind others to keep their distance.
One of the most significant changes office workers could see is the spacing of desks to maintain distance, “every other” seat arrangements (where employees are staggered diagonally rather than directly across from each other) or possible snap-on desk partitions to give employees more of a sense of protection.
As I said, IT IS GOING TO BE A BRAVE NEW WORLD!
Large retail chains in the U.S. were already diversifying their supply sourcing. And now they have even more work cut out for them in the wake of the pandemic.
They face increasing pressure to raise wages and provide better benefits such as sick leave. Many are looking at how they can reconfigure their physical stores — such as widening aisles and making them one-way — and doing away with cash and credit card hand exchanges, as they feel even more heat from internet rivals such as Amazon.
Malls in China report that traffic was 75% of normal in the first month of reopening. Luxury retail brands have seen their sales return to normal in the first month.
John Donahue, the CEO of Nike, says he is using their experience of reopening in China as their playbook for reopening in America. They have now opened most of their stores in China and have experienced excellent sales. Also, their digital sales in China have climbed by triple-digit growth.
That may be the secret of survival for retail stores — to offer both online and in-shop sales.
Airlines & Air Travel:
Air travel after the coronavirus will look and feel a lot different from the last time anyone boarded a plane.
Just like after 9/11, air travel is going to require a lot of patience—as well as a face mask.
Everything is going to take longer!
Expect new procedures for everything from luggage check-in to security clearance and boarding. You might even need to have your blood tested to prove you’re in good health before boarding.
The big question: How much hassle will people tolerate, or will they avoid flying altogether?
Airlines are starting to require all passengers to wear mandatory face masks while flying. They also say that for the time being, they will not book middle seats. But airline customers are complaining that they are not doing this.
Unfortunately, masks and social distancing are only the beginning as to how air travel might change in the coming months and years.
According to Axios, here are some examples:
- Online check-in: Besides choosing their seat or paying for checked bags, passengers might also need to upload a document to confirm the presence of COVID-19 antibodies before they fly.
- Airport curbside: Passengers could be required to arrive at least four hours ahead of their flight, and pass through a “disinfection tunnel” or thermal scanner to check their temperature before being allowed to enter the airport.
- Check-in and bag drop: New touchless kiosks would allow passengers to check-in by scanning a barcode, or using gestures or voice commands. Agents would be behind plexiglass shields, and bags would be disinfected and then “sanitagged.”
- Health check: Passengers would undergo a health screening, and potentially even have their blood tested.
- Security: Each carry-on bag and security bin would be disinfected when entering the X-ray machine, using fogging or UV-ray techniques, then “sanitagged.”
- Boarding: Passengers would need to be present an hour before departure, maintain social distancing in the gate area, and board only when they receive individual notifications on their smartphones to prevent crowding in the jet bridge.
- On the plane: The pre-flight safety video might include sanitation procedures, as passengers wipe down their seats and tray tables. In-flight magazines will be removed, seatback pockets emptied, and passengers will likely use their own devices to watch videos. An in-flight janitor might keep lavatories and other high-touch areas disinfected after passenger use.
The bottom line: If it seems hard to fathom, remember this: we never imagined we’d have to take off our shoes before passing through airport security, either.
While demand for cars won’t bounce back quickly, unlike in other industries, factory workers have a clear outline of what it would take to return to production. Carmakers and suppliers in China have implemented protocols to ensure working conditions were safe to return to for employees. Aside from extensively cleaning and sanitizing work areas, there are new processes to keep workers more separated, including when entering and exiting plants and offices.
Other initiatives include all employees continuing to wear masks, limiting in-person meetings, and even taking employees’ temperatures when entering facilities.
Banks And Financial Services:
Unlike many industries, investment banks and other financial services have been able to transition to an at-home working environment reasonably smoothly. Nearly all of Goldman Sachs employees were working from home in about two weeks.
Goldman Sachs is also considering the purchase of infrared body scanners to screen people coming into their buildings who are obviously sick.
Investors are being inundated with grim economic data from March and April. Although it doesn’t look pretty, stocks are mostly standing their ground, and America is about to reopen.
I still believe the S&P 500 Index will end the year higher.
For investors, the best strategy is not to be panicked into selling but to ride out this economic disruption for the next few months and solely focus on your health and the health of your family.
We know this is a very fearful time, but B. Riley Wealth Management is here for you, and we will continue to share our stock market views every Monday. Thank you for reading.
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Paul Dietrich is the Chief Investment Strategist for B. Riley Wealth Management. B. Riley Wealth Management offers comprehensive financial solutions to clients through its network of
over 160 experienced financial advisors across 13 states. The firm manages more than $11 billion in client assets and serves approximately 34,000 client accounts.