Advisor Talking Points – Reopening The U.S. Economy – A Brave New World
for Financial Advisors
The S&P 500 Index has rebounded 28.5% off its March 23rd low, though it remains 15% below its Feb. 19th peak.
Year-to date the S&P 500 Index is down 11%.
The stock market today is at the same level as it was 52-weeks ago!
Bottom Line: Given the near-complete shutdown of the U.S. economy, only being down 11% year-to-date is a minor correction in the stock market.
How can that be?
The stock market seems to have chosen to look through what is expected to be a dramatic drop in earnings, and forward to a resurgence in economic activity in the not-too-distant future.
The market is a forward-looking discounting mechanism, and it seems to be indicating its belief that a worst-case recession is less likely, and a quicker-than-expected recovery is more likely.
There are several explanations for this seeming contradiction. One is that markets are reacting not just to where the economy is, but also to the range of outcomes for where it is going. While the economy is still contracting sharply, incremental news on both the economy, such as jobless claims and the pandemic are not as bad as feared.
Typically, investors focus on financial and economic indicators, such as revenues and profits. Now, though, they are focusing on public health data. The recession is being driven by lockdowns and social distancing, which is, in turn, driven by the pandemic. A shift in the pandemic is a prerequisite for a turn in the economy.
The U.S. government’s fiscal and monetary stimulus will prevent a lot of companies from going bankrupt. Still, it won’t prevent sales and earnings from declining—probably by more than Wall Street analysts now expect.
Economists expect output to be down 7% in the current quarter from a year ago, the steepest year-over-year drop in over 70 years, yet analysts expect profits to fall only about 27%. That’s less than half the steepest drop experienced during the last recession.
Also, analysts don’t see this as an ordinary recession; this Coronavirus is similar to a natural disaster that, in theory, should have only a transitory impact on the economy.
Afterward, workers and companies should be able to pick up where they left off. Analysts report that 70% of big-company layoffs are temporary, compared with less than 1% during the last recession.
Most economists see the recent rally as a sign the U.S. will make a speedy recovery when the coronavirus crisis eases. They have also been encouraged in recent days by signs that several states will move to resume business, along with hopes that a viable treatment for the Coronavirus could be near.
Most analysts agree the most critical driver of the rebound has been the Federal Reserve’s massive stimulus plan, combined with the efforts of the U.S. government, which sent a signal that both were willing to step in like never before to offset the damage the shutdown has caused to the economy.
Many investors are now betting on a so-called V-shaped recovery—a sharp slowdown and then a quick economic recovery. Goldman Sachs economists expect the economy to significantly contract in the first and second quarters before rebounding later in the year.
Reopening The U.S. Economy—Nothing Will Be The Same!
Remember 9/11? Americans now stand in line for an hour, take off their shoes, and go through extensive checks before they can board an airline. We go through metal detectors at sporting events and now have to show an ID before we can enter most office buildings. That didn’t happen before 9/11.
We will see even more dramatic changes to our daily lives in the aftermath of the Coronavirus pandemic. Nothing will be the same.
Until there is a vaccine and all Americans have been vaccinated, it will be impossible for daily life to go back to where it was in January of this year.
Over the next two or three months, we will see a phased reopening of America. Construction, manufacturing, schools, and retail shops will be given priority. Restaurants, bars, and other social venues will come later.
Public-health officials warn politicians that they need to move slowly—potentially waiting a month between each new step—and be prepared to reverse themselves quickly if infections start a quick spread again.
The good news is that if we do things right, we can limit the damage from the coronavirus downturn and restore much of what has been lost. If we do something wrong, however, we’ll only end up with more deaths and an even bigger hit to the economy.
Unless people feel safe, lifting restrictions won’t do much for affected sectors like restaurants, bars, sporting events, and airlines, where demand has fallen and could stay far below normal until a Coronavirus treatment or vaccine is found.
Prematurely ending controls also risks overwhelming health systems without doing anything for workers and businesses. Even those politicians who most want to reopen the economy quickly will have a hard time convincing people that it’s safe to go out if deaths continue to increase every day, which is what will happen if we don’t stop the spread of the virus.
However, some sectors—notably manufacturing and construction—should be able to get back to work relatively quickly with the aid of additional protective gear.
Also, more than 20% of American workers, such as hairstylists and dentists, need to be extremely close to other people to do their jobs. But, with the right protective gear, they should be able to reopen quickly.
Most analysts believe about 80% of the U.S. economy could reopen and get back to normal before a vaccine becomes available.
Some Random Facts From Asian & European Experiences in Reopening Their Economies:
South Korean mass transit traffic was down roughly 40% from normal during the first month of reopening. South Korean retail traffic was down 17%, and visits to recreational venues were down 14% in the first month after reopening. However, movie theaters are open, but no one is going.
Taiwan’s retail traffic is down 22% and mass transit down 28% in the past month. Theaters are virtually empty.
In China, most of the country reopened last month, but retail spending was down 18% below its level of last year. Restaurants and bars are still down about 50%.
In Denmark, schools have reopened first. But everything has changed. To stop the spread of infection, parents aren’t allowed inside the school. Teachers can’t gather together in the staff room. The children each now have their own desks, marooned two yards away from their nearest neighbor. During recess, they can play only in small groups. And by the time the school shuts down at 2 p.m., they all have had to wash their hands at least once an hour for the past six hours.
The school’s floors have been covered with new markings, showing pupils how far apart they have to stand. Hand-washing has become a part of the school routine — the first stop for all pupils at the start of every day, and then on the hour after that. Tea ladies have the new task of touring the school with disinfectant, cleaning each door handle at least twice during school hours.
Reopening The Economy Here In America
Restaurants & Bars: As we start to open restaurants and bars in the U.S., don’t be surprised to see waiters and servers in gloves and face masks, giving you a disposable menu. When you enter the restaurant, they may take your temperature with those laser temperature guns, and there will be fewer seats and tables in the restaurant for social distancing. Bars will limit capacity at the bar for social distancing.
Airlines: TSA will now take your temperature as you go through the TSA checkpoint. Passengers and airline staff will be required to wear masks when not eating on the flight. Airlines are talking about new seats with plexiglass dividers between passengers. Airplanes will be disinfected after each flight. I hope they make the seats wider!
Factories: All worker’s temperatures will be taken as they come to work. They will all have to wear masks and gloves. There will be plexiglass dividers between work stations. Plus, more cleaning and disinfecting protocols.
Retail Stores: Staff will be required to wear masks and gloves. There will be plexiglass dividers separating the checkout staff and the customer.
Sporting Events – Churches – Amusement Parks – Theaters – Movies: These churches and businesses will be the last to open up. They are going to have to come up with some creative solutions so people will feel safe at these more social venues before they can open. As we have seen in Asia, even when they are open to the public, no one is going to these places. For many people, they will only feel safe to return to these venues after a vaccine has been developed and broadly used by everyone.
What I Have Been Reading During the Coronavirus Stay-at-Home
After leaving New York a month ago, I have been self-quarantining myself at my horse farm in Northern Virginia.
If you think everything is closed in big cities, nothing is open in rural Virginia.
That has been a blessing in that it has given me an excuse to reread many of my favorite books or the pile of books I always intended to read but hadn’t gotten around to yet.
Most of my days are consumed with reading on my computer 12 daily newspapers from around the world, skimming through about 23 business and market websites and reading scores of investment and market reports that magically appear in my inbox every single day.
But at night, after a day of studying the smallest effects of the Coronavirus on the U.S. and world economy, I am ready for some reading that feeds the soul. So, here are a few of the books I have been reading this past month.
It has been interesting to me to see how this Coronavirus pandemic, the healthcare crisis, the deaths, the grieving, the unemployment, the economic pain, and suffering colors and informs everything you are reading.
Whenever the world seems a bit depressing, I always reread the great Spanish writer and Nobel Laureate, Federico Garcia Lorca’s book, “In Search of Duende.” Duende for Lorca is a kind of passion for life—an expression of authenticity—a kind of God-given grace that is hidden (and can always be awakened) in all of us. This book always reminds me of what is really important in life.
I also reread two of my all-time favorite books, Boris Pasternak’s “Doctor Zhivago” and Nikos Kazantzakis’ “Zorba the Greek.” Both of these books won their author’s the Nobel Prize in Literature. Almost everyone has seen the Academy Award-winning films based on these two books—but practically no one has actually read them. Reading these books is a pure, unadulterated pleasure! The writing is so good that you almost have to read every page over and over again for the sheer joy of the language. That is something you will never get from the movie.
The same is true for Michael Ondaatje’s novel, “The English Patient.” This book has been on the shortlist for the Nobel Prize, but he hasn’t won it yet. Ondaatje is currently the world’s greatest living novelist. On every page, you revel in the sublime language of one of the greatest writers of all time.
Another great book I finally finished last week was Diane K. Osbon’s, “A Joseph Campbell Companion: Reflections on the Art of Living.” Joe Campbell was a famous Classics scholar and mythologist. He taught most of his life in obscurity at Sarah Lawrence College. Near the end of his life, George Lucas wrote the first Star Wars trilogy of film scripts and based all of them on Joseph Campbell’s 1949 classic book, “The Hero With A Thousand Faces.” The “Joseph Campbell Companion” is a concise compilation of all the classic philosophical and mythological underpinnings of the Star War series. This is an excellent introduction to classic philosophy.
I reread two weeks ago, my favorite book of 2019, written by New York Times columnist, David Brooks, “The Second Story Mountain.” The book is about leading a meaningful life in a self-centered world. This is a perfect book for these times!
Two other books that have sustained me during this self-quarantine are two of my favorite books of poetry. Mary Oliver’s book, “Why I Wake Early: New Poems.” Mary Oliver died last year but was the greatest poet of her generation. Her poetry is hard to explain, but it is all about the smallest aspects of nature—and redemption.
My other favorite book of poetry is Bryan Doyle’s, “One Long River of Song: Notes on Wonder.” If you have never read a book of poetry, this is the one you want to buy. His poem, “Joyas Voladoras” and his 9/11 poem called, “Leap,” will take your breath away.
Lastly, I picked up an old book I had never read called “The Last Man” by Mary Shelly, the wife of the famous poet Percy Bysshe Shelly (she also wrote the famous novel “Frankenstein”).
She wrote this novel in 1826, about a virus pandemic that spreads worldwide in 2092, almost 250 years later.
She wrote the novel after the death of two of her three children, who died from a pandemic virus and the death of her husband.
In her novel, as the pandemic sweeps the world and takes her loved ones one by one, Shelly asks the question, why live?
At the height of the deadly pandemic, nature seems all the more quietly determined to affirm the resilience of life — spring arrives with its bursts of beauty, untrammeled by human suffering.
Shelley writes: “Winter passed away; and spring, led by the months, awakened life in all nature. The forest was dressed in green; the young calves frisked on the new-sprung grass; the wind-winged shadows of light clouds sped over the green cornfields; the hermit cuckoo repeated his monotonous all-hail to the season; the nightingale, bird of love and minion of the evening star, filled the woods with song; while Venus lingered in the warm sunset, and the young green of the trees lay in gentle relief along the clear horizon.”
Shelley ultimately captures the essence of what it means to be human: “There is but one solution to the intricate riddle of life; to improve ourselves, and contribute to the happiness of others.”
AMEN to that in these difficult times……..
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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.