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.
