Opinion: Advisor Talking Points – Some Light at the End of the Tunnel

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TALKING POINTS
For Financial Advisors 

by
Paul Dietrich
Chief Investment Strategist
B. Riley Wealth Management

 

A month ago, a TV anchor in New York asked me when the Coronavirus pandemic would be over, and when would the stock market finally bottom.

I told her I couldn’t give her a specific date, but I could tell her the precise criteria that would be needed to know when everything would be returned to normal.

With regard to the end of the Coronavirus pandemic, I said the virus in China, South Korea, Italy, and Spain, followed almost an identical “bell curve” cycle from the first case up to the peak of new cases, and then started a steep decline until deaths and hospitalizations began to return to normal.

With regard to a stock market bottom, I told her the U.S. Government would need to pass a massive stimulus bill that would completely offset ALL of the economic damage caused by the government shutting down the U.S. economy.  The Congress has now passed a $2.2 trillion emergency bill.  However, it remains to be seen whether the federal government and the states can distribute that money quickly enough before average workers and small business people have to throw in the towel.

Both of these criteria have now been met. Most epidemiologists believe the virus has now peaked in the U.S. and we should see a steep decline in new cases and deaths over the next four-to-six weeks.

Congress has also passed a $2.2 trillion emergency stimulus legislation package, combined with the Federal Reserves’ $4 trillion loan facility to make businesses whole, that should more than offset the expected loss of $4.5 trillion in GDP between the beginning of the shutdown in mid-March through the end of May.

This legislation and loan facilities will cover and should make whole the salary and business operational losses from the expected two-and-a-half-month shutdown of the U.S. economy.  Still, it would not cover lost tax revenues from states and other state and local hospital and healthcare costs in dealing with this pandemic.  That will require another emergency legislative package.

The Stock Market’s Response

It is hard to believe, but in less than two months, the S&P 500 Index went from a historic record stock market high on February 19th and then dropped 33% on March 23rd into a bear market, and then rebounded 25% as of last Thursday, April 9th into technically a new bull market.

 

Talking-Points-SPX-Chart

 

The stock market is a forward-looking discounting mechanism that seems to be saying the worst-case scenario of recession is less likely, and a quicker-than-expected recovery is more likely.

There can be no question that earnings for the last quarter and the next two quarters will show a shocking decline.

But in the long-term, the stock market is discounting this historically unique health and financial crisis and believing that the U.S. government stimulus packages are eventually going to make these companies whole again.

They believe that because this is an election year, and many will fear for their jobs if they don’t make good on their promises.

I believe the stock market is looking beyond the economic damage of the next three to six months and seeing a brighter recovery.  This is something you wouldn’t see in a typical recession.

Because of the U.S. Congress’ emergency legislation, they are looking at the unemployment rate as something that will not continue indefinitely, but more as a furlough.

The stock market is also reflecting a sentiment that the worst-case scenarios of public-health officials may not happen. Because of aggressive social distancing and stay-at-home orders, the public-health models are now being revised downward.

We are also seeing that after months of lockdown, China, South Korea, Taiwan, and Singapore are reopening restaurants.  Restaurants are serving customers; schools are admitting or about to admit students and factories and retail shops are now open.

Not everything is completely back to normal in that movie theaters are still closed, and large gatherings like sporting events are still forbidden.

While the death toll of virus victims in China may have been higher than the government reported, the resumption of economic activity in China and other Asian countries can be seen by everyone and cannot easily be faked.

What Could Go Wrong in The Short-Term?

While we may see the light at the end of the tunnel, there may be another six-to-eight week of uncertainty (and stock market volatility) before we exit the tunnel—and anything can happen to frighten investors into more panic selling.  Here are a few things that might negatively affect the stock market in the short-term:

Earnings over the next two quarters are going to be terrible. We already know that, but when they are announced, the stock market could react negatively. Again, in the end, the U.S. stimulus packages should offset or at least soften these earnings decline.

Gross Domestic Product (GDP) will also drop. JP Morgan economists now expect GDP to contract in the second quarter by 40%. They also believe that unemployment will technically rise to 20%. But these same economists continue to see a second-half recovery, based on the assumption that disruptions from the pandemic will fade by June. They expect the third quarter to rebound with growth of 23%, and a fourth-quarter increase of 13%. They forecast a 10% decline in the first quarter. JP Morgan sees restrictions on many activities and stay-at-home orders continuing through May, with a rebound starting in June.

Hick-ups in the delivery of emergency funds. The distribution of checks to laid-off employees and funds to small businesses has not gone smoothly. If this continues, it could negatively impact the stock market.

Reopening the economy too quickly. While the Administration wants to reopen the economy in May, almost all public-health officials say the virus models won’t show a significant reduction in new cases and deaths until the end of May or the first part of June. If the Administration reopens the economy too soon and we have a resurgence in Coronavirus deaths and have to close the economy a second time. The stock market could plunge.

Is This A Recession?

Many TV pundits, some of whom are journalists and medical doctors have started to give their opinions on the economy. Many are incorrectly using the term recession.

As I have said before, unfortunately, there are few good historical analogies as to what is happening now.

But what we have seen so far is not a recession in the ordinary sense.

A recession historically happens when there isn’t enough spending, or there isn’t enough demand for goods.

What’s happening now is the U.S. government has deliberately shut down a large part of the U.S. economy because we are trying to stop the spread of this pandemic.

Most analysts believe that this unprecedented historical crisis should more appropriately be looked at like a national hurricane—a kind of national Hurricane Katrina.

While it should be considered as a natural disaster, we have to acknowledge that this is a man-made misfortune because the lockdown of people and the closing down of the entire economy resulted from government dictates because of the health crisis.

The good economic news is, that if the economic contraction is primarily man-made and not economically systemic like real recessions, it should be relatively simple to reverse.

The stock market seems to believe that we may see a short, shallow, technical recession, and a quick recovery.

Many analysts believe that when economic downturns are deliberately induced, and negative growth policies are perceived as temporary, businesses are incentivized to minimize permanent layoffs and the associated cost and revenue disruptions they produce.  This is especially true if they believe the new stimulus packages will reimburse them for salary and operational costs.

For investors, the best strategy is not to be panicked into selling but to ride out this economic disruption for the next four to six weeks and solely focus on your health and the health of your family.

Who Is an Essential Worker?

Last night I read a Facebook post from an old college friend who is now an emergency room doctor in Colorado.

He talked about working 16-hour days and the enormous physical and psychological toll it was taking on his family. He said dealing with the massive death toll every day was the hardest part of his job. He said his wife and children were constantly worried that he would contract the virus.

He also said every night after his shift ended, he would call all of his nurses and other health care workers to make sure they were all right.

He also gave up his lunch hours to make calls to construction companies to see if they could donate their construction face masks to the hospital. They donated over 9,000 masks.

America put men on the moon 51 years ago. It seems like a national disgrace that we can’t protect our doctors, nurses, and other healthcare workers with paper masks and plastic gowns. This is not high tech!!!

This week we celebrated Easter and Passover.

I was thinking about how my own views on who in our society is really an essential worker have changed for me over the past month.

All of those individuals who go to work each day so that the majority of us can safely stay-at-home.

In the 1300s, there was a Christian mystic by the name of Meister Eckhart.  He famously said, “if the only prayer you ever learn in your life is ‘thank you,’ that will suffice.”

I am so deeply grateful for my friend, the emergency room physician, and all doctors, nurses, health care, and EMT workers and how they go to work every day, risking their lives and the health of their families because that is what they do. This is what bravery looks like to me! Thank you!

To all the postal workers and drivers who deliver our food in the middle of the night to grocery stores and to the Fed Ex and UPS drivers who leave our packages on our doorsteps.  Thank you!

To all the pharmacists who fill our prescriptions and people who stock the shelves and run the check out at our grocery stores.  Thank you!

To all the policemen and firefighters who risk their lives every day. Thank you!

To all the National Guard members delivering medical supplies and the Army Corp of Engineers building thousand-bed hospitals in four days.  Thank you!

And to all the faith-based and community volunteers donating their time at food banks.  Thank you!

During this Coronavirus crisis and in the spirit of this season of redemption, renewal, death………and Resurrection

Happy Easter!   Happy Passover!

 

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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