What Goes Up Must Come Down and vice versa, or so the
saying goes. But what earmarks the past 60 days has been a veritable cacophony
of competing themes impacting the economy, politics, popular culture and most
noticeable to us, the markets. The markets are a predictor of the future, hence
why no one has ever been able to predict them based on anything but luck. Or is
it only luck? What goes up must come down, so by definition what goes down must
go up. That outcome can be tracked since the beginning of capital market data
collection. So, while many pundits and analysts are hyper focused on picking
the tops and the bottoms, I’ll work to analyze the more reliable measures that
history has shown us and will almost surely show us again.
Up and Down
The most immediate effect of the pandemic was the rush
home of employees around the country, especially in the major cities. Companies
then complied independently to send employees home but left many without clear
indication of their employment status. So, the follow up to that activity was
Unemployment Claims going up over 6 million claims which has since gone up an
additional 14 million claims. This was followed by a spike up in the
unemployment rate from 3.5% to 4.5% with predictions for the next release date
for data predicting over 10%. The re-employment of people separated from their
work by the virus will, in my opinion, likely be uneven. But our country has
made it clear double digit unemployment is unacceptable, and what went up, will
therefore, likely go down.
Down and Up
This is where what goes down must come up meets the stock
market. Led by stocks in all the broad indexes, equities declined with an
intensity that even long term investors such as myself have never seen, expect
for the one day affair that took place in 1987. The difference was in the
trigger. As the pandemic began to spread, even before officially labeled a
pandemic the declines in the leisure sectors of the economy accelerated. This
is important to point out as economic declines that accompanied the markets
decline were not the cause of one another’s solvent condition. No banks have
failed, there were no unforeseen cracks in the economic infrastructure. Rather
the government’s response initiated our upcoming recession, the question
therefore is not how, but when they planned to pull us out.
And Inside Out
Social distancing, masks, and gloves and the closing of
global channels of transportation were the first positions taken to attack the
virus. As the repercussion of those actions, such as the grounding of the
airline industry, became clearer to the general public personally and via the
news, the economy became a new space to binge watch. One thing that easily
caught people’s attention were the steps taken by government agencies to bring
a stimulus package to both houses for passage. They delivered one that was more
than twice the size of the package that came with the financial crisis. The
next program was the move by pharmaceutical companies large and small aiming to
come with not just a cure, but a treatment in historically short time. And all
was punctuated with global cooperation. Most impressive was the vigilance shown
by many domestic companies that cut dividends, executive pay, and made public
promises to stand by their workers and the communities they work in. I would
like to see that one stick into the future.
There is a saying that when flying, pilots do not usually
take off without having some idea where they intend to land. That is why I am
confident that there will be a way out of our dilemma. And that is where the
markets come in. The recent rally in equities, topped off today by news that
Gilead’s (GILD) drug, Remdesivir, while still in testing was showing clear
signs of working. Namely, not at curing the virus but of treating the virus
before it gets serious. This is the kind of good news that the markets
expected. But what of the upcoming economic news? I have mentioned that the
dourest of predictions regarding the economic results of the national lockdown
are strategically positioning such predictions to be proven more likely wrong
when the data is released. In my opinion, to be buying the market now, is not a
good way to prepare. Given the strength that the broad indexes might see or the
weakness they may experience, having both investment exposure and investable
cash is a strategy that helps weather the volatility. For now, that is the only
up and down I pay attention to.
