Advisor Talking Points: Investor’s Questions & Answers – COVID, The Economy & The Election

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Market Commentary

 

Question:  Will The Massive Spike In New Coronavirus Cases And The Rollback Of Openings In Some Cities Affect The V-Shaped Economic Recovery?

Over the past few weeks, both the stock market and the underlying economy have started to trend sideways.  You can see that in the graphs below.

I am afraid we may see this directional, sideways trend continue in both the stock market and the economy if state governments can’t stop the spread of the Coronavirus pandemic because many Americans still refuse to wear masks and social distance.

Over the summer and fall, we may see pullbacks in the reopening process and maybe a few targeted lockdowns to contain a second wave.  This will not stop the overall U.S. economic expansion, but it definitely could hinder or slow the second-half expansion.

As you can see from these current graphs below of the S&P 500 Index, the NASDAQ Index and the ECRI Weekly Leading Index of leading economic indicators, both the stock market and the broad underlying economy are in the midst of a clear V-shaped recovery—or as some people call it, a “Nike Swoosh-like” recovery.

 

 

 

Federal Reserve Stimulus Is Driving The Stock Market Up

Sometime in the next few weeks, Congress will pass new stimulus legislation worth an expected $1.5 trillion.

Investors need to understand that the most significant driver of stock prices right now is the enormous amount of liquidity that Congress and the Federal Reserve have injected into the economy to offset the economic damage caused by the Coronavirus pandemic.

Markets have primarily been resilient because investors expect further support from Congress and the Federal Reserve if the pandemic begins to slow the economy again.

An investor can now make more in current income from dividend-paying stocks than from high-quality fixed-income securities while participating in any future appreciation in stock prices.  Stock prices can always go down, but over the long-term, they have generally appreciated.

This, in a nutshell, is why most analysts believe the stock market will continue to go up both this year and next.

Some U.S. Firms Are Seeing Record Profits

Except for the broad travel and hospitality industry, which the stock market has already significantly discounted until there is a widely available vaccine, the rest of the U.S. economy is recovering nicely.

Although airlines and hotels are publicly traded, most bars, restaurants, professional sports teams, etc. are primarily privately-owned companies and have almost no effect on the S&P 500 or the broader stock market. While no one wants to see bars closed for any length of time, if the government did close down every bar in America for a year, it would cause a decline in U.S. GDP of less than 1%.

Cable news tends to focus only on those businesses and industries that are being hurt by the COVID crisis.  But many industries like manufacturing, consumer services, tech, and other industries are already back to where they were before the lockdown.

According to a new study by Oxfam America, many U.S. companies have seen record profits throughout this year.

An analysis of the study found that 17 of the largest and most profitable American corporations, including Microsoft, Facebook, Johnson & Johnson, Intel, Visa, and Pfizer, are expected to make over $85 billion more in 2020 profits than last year.

Oxfam’s analysis said the 25 most profitable largest companies in America have, on average, made over 11% higher net profits in the first six months of 2020 compared with their average net profit gain for the same time period going back to 2016.

A lot of companies are doing even better than that.

Analysts are projecting Microsoft will make 82% more net profit in 2020 than it averaged in the previous four years; Merck, 81% more; and CVS, 61% more.

According to the study, the companies that have done exceptionally well during the pandemic have tended to make or provide essential goods and services such as Internet telecommunications, medicines, and critical consumer products.

 

Question:  What To Watch For In The Next 100-Days Before The Election

A lot can happen in the next 100-days before this election.  People will start early voting in many states in just two months.

Over the past few weeks, I have spoken with a number of both Republican and Democratic political operatives who are either working on or are close to both presidential campaigns.

According to the RealClearPolitics composites of polling data, if the election were held today, the Democrats would decisively win the Presidency, the House and the Senate.

So I have asked all of the political operatives and consultants what they thought could go wrong or change the direction of their campaigns.  Here is a summary of their thoughts:

 

Remember The Last Election—The Polls Aren’t Always Right

History tells us that it might be a mistake to assume the polls are right.  In three of the last ten elections, the candidate with a lead at the beginning of August lost the popular vote in November, although two of them went on to win the Electoral College and won the White House.

Only one candidate, Michael Dukakis, was ahead in August and then lost the election.  That was in 1988.

 

If The Election Is A Referendum On President Trump—He Loses

All of the political operatives agreed that if the election ends up being about President Trump and his competence in managing the Coronavirus crisis and the reopening of the economy, he will lose.  They all agreed that Trump must make this election a choice between him and Joe Biden.  Or, if Trump can, he needs to make this a referendum on Biden and whether he is up to the job.

Right now, at 74, Trump is the oldest person ever to be President.  But he has alleged that at 77, Biden is not mentally up to the job of being President.  Trump has said in campaign speeches that Biden is slipping and doesn’t have the strength, stamina, and mental fortitude to lead the country.  I am still not sure how well this attack will go over with Trump’s broad base of older voters.

 

The Debates Are A Real Risk For Both Candidates—They Could Change The Election

The Presidential Debates are scheduled for September 29, October 15, and October 22.  Given that both candidates are prone to verbal gaffes, these three debates will show who has the mental sharpness. Also, any misstep will be magnified for the whole world to see.  Anything could happen.

 

An Effective Vaccine & The Economy

This is Trump’s Achilles heel.  Right now, Trump is suffering from devastating poll numbers on his handling of the COVID crisis and his erratic and confusing policies about masks and reopening the economy and schools.  This crisis has cost more than 148,000 Americans their lives.

He might be able to change the narrative if he can announce the success of one of the vaccines in Phase 3 human trials.  In the end, the vaccine must be safe, effective, affordable, and widely available.

Although many scientists believe it is unlikely any of the vaccine human trials will be finished before the election, if he could announce this, it would give some assurances that we could control the virus and eventually return to some kind of normal.  It could also boost the stock market.

The announcement of a successful vaccine is also crucial to the full recovery of the economy.

The economy was going to be Trump’s signature campaign issue.  But if new cases and deaths are still spiking before the election and cities and schools are closing down again, this could be the death knell for Trump.

Currently, national polls show that Trump only beats Biden by 1% (Trump’s 46% to Biden’s 45%) in who voters think would be best at managing the economy.

 

Will There Be An October Surprise?

Every political operative mentioned the possibility that a last-minute “October Surprise” could derail either campaign.  No one knew what that surprise could be, but given the history, they were all expecting something.

Remember James Comey’s press conference on October 28, 2016, that he might reopen the investigation of Hillary Clinton’s email server?

Remember when Lehman Brothers filed for bankruptcy on September 15, 2008, starting the Great Recession.

BUCKLE UP!  The next three months before the election, may seem like a lifetime………

 

 

NOTE: This report is authorized for distribution to clients

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.

 

 

 

 

 

 

 

 

 

 

 

 

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