April 17, 2020

Ups And Downs

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.