April 9, 2020

Seeing Stars in NYC Skies

The Markets
The markets finished the shorted week with the S&P 500 up nearly 12%. Much of the gains were in industries that saw the deepest declines such as energy, consumer industries including restaurants, and airlines and to a lesser extent defensive companies such as Mondelez (MDLZ) and Costco (COST), the latter which released earnings today that were slightly less than expected even with the well-advertised droves of shoppers fighting over empty shelves. Costco probably also gave a clear signal to the potential for an earning season of poor “relative’ results. And because the markets seem to want to ignore poor results, in fact they were strong enough to move nearly every stock in the broad indexes, I’m glad we were long enough to participate.

The Economy
During a press conference today Chairman Powell brought another $2 Trillion to the economy to offer support to industries in need of capital through the credit markets. Even high Yield debt, traditional low credit debt, got the thumbs up from the Fed Chairman. In all the security offered by the Fed has been welcome and effective. Going forward the plan is for capital to be returned though typical channels of maturing debt, but it’s premature to be overly optimistic. For now, the interesting question posed to the Chairman at his press conference was whether all of the activities amounted to growing potential for inflation. The Chairman answered that inflation hasn’t risen materially since before the financial crisis and was not a concern now. I’ll watch the price action of Inflation Indexed securities before I fully agree.

    The narrative this week was challenging. Today as the broad indexes moved higher it was pointed out that the week was the best since 1974. That point stood out for me since I started to focus on the capital markets when I began my career on Wall Street in the late 70’s. Inflation was 12%, 10yr Treasury yields were over 10% and I set about doing what I do to this day, looking for the reason why. Without getting too long winded, the seventies saw the first rise in oil prices and the economic challenge it posed for the near midpoint of the industrial revolution was felt globally. Likewise, the challenge of inflation was the outgrowth of an economy that was doing reasonably well. Overall, the move to drive oil prices lower requires a weaker dollar, which is inflationary, broad speculation in currencies, mostly engaged in by the large multinational corporations hedging their overseas profits, and a Federal Reserve Board that keeps interest rates artificially low. Sound familiar?
    Much is talked about these days regarding the outcome of all the activities that the Fed and all bodies of Government are engaged in, namely the return to normal. But what is the return to normal and the excitement it’s created for everyone from the hard core deficit hawks to the conspiracy theorists’ outcries of the brave new world. In the meantime, the stock market is moving higher, and rather than point to anything current that is concrete evidence of balance sheet strength, it seems more the growing expectations of the unknown rule. And the reality of historically low interest rates, near historically low oil prices, historically high jobless claims and historically high number of those employed working from home remotely, all situations are expected to return to normal. And the historically influential global pandemic causing industries to shut down, people all over the world to engage in social distancing and other health oriented disciplines, all of which are driving sentiment indicators lower by the week. All that is expected to return to normal as well. And in the background the other event that should be getting more attention, namely the recognizable decline in pollution around the world, is that going to return to normal. Frankly, normal doesn’t sound possible nor in some ways desirable, but I have no idea, I’m looking for ways to invest in it.