August 21, 2020

When in Doubt Blame the Pandemic

There is little to focus on in the global markets that isn’t already too familiar to most us. In fact it’s hard to keep revisiting the data that defends specific stock and market behavior without including the preciseness of its asymmetric behavior to the global economies. But the pundits whining about the disconnect between Main Street and Wall Street ignore many of the similarities of the construct of the broad indexes that existed during previous recessions. I’m referring to the outliers of my pre/post Covid strategy. Namely those companies that have shown strong efficiencies in delivering products and services during the pandemic. I’m talking about Amazon ((AMZN) Costco (COST) and United Parcel Service (UPS) whose contributions to improving the lives of homebound consumers were also eye openers to the wider consumer community, namely that it’s easier to have groceries bought on the internet and delivered, it’s easier to get everyday products  bought on the internet and delivered. Other companies that have served full-time remote workers who now represent 23.7%, approximately 23milion workers of the US Labor Force according to the US Bureau of Labor Statistics, have also impacted growth in cloud companies and digital device companies such as Microsoft (MSFT), Apple (AAPL) and Nvidia (NVDA). Now, by nearly all measure the stocks of these companies are overbought and due for a technical correction. I say technical, because valuations of the companies that thrive on digital efficiencies are not necessarily fly by nights unless you believe the consumer is going to revert back to pre Covid behavior. Therefore, it’s worth asking the question, that when lifestyles return to some degree of normalcy is there any reason workers and consumers will stop using the above services and products? In my opinion, no.

The broad markets finished the week at a level that makes me cautious, again. But to be more precise, I’m cautious of the potential disruption of an external event than I am of the broader economy or even the markets themselves. As far as the broad indexes go, there is a disproportionate number of companies representing industries such as leisure, entertainment, sports, and any  companies that earn its revenue through dense social activity. Being, by definition, the true destinations of discretionary consumer spending, the scenario, as far as the S&P 500 goes, is a picture of recessions reminiscent of previous recessions. The one exception is the level of unemployment, which this week saw weekly initial claims move back above 1 million. My thoughts are this number is more indictive of the resumption of unemployment benefits and the administration’s extension of the weekly additional payments. And although the latter addition is roughly half of the previous weekly added compensation, there could be some indication of moderation in consumer spending according to the Bloomberg Consumer Expectations Survey. I bring this up because even though existing claims saw a favorable decline, both remain at historic levels and it will only be a vaccine that will take the National Unemployment Rate comfortably below 10%. More optimistic data came today in the release of the Purchasing Managers Index (PMI) for Services which went up to 54.8 and above 50 for the first time since January and highest level since March 2019 (above 50 indicates expansion).  However, just as there is context in discussion of the favorable trends in poor statistics, the PMI numbers which I’ve outlined regularly in my weekly comments is showing a broadening of growth in the private sector, but not a return to pre-pandemic output levels, yet. 

Last, but not least, this week the first presidential convention ended with the candidate making point  that corporate and high net worth  entities would see higher taxes, if elected. This always stands out to me because as I’ve repeatedly written, its legislation that matters most to the capital markets not rhetoric. But taxes are a definite possibility should one party take control of the houses, in addition to the White House. In the current administrations time at bat there was an expected tax cut, delivering primarily to the corporate sector, that took corporate taxes from 35% to 21%. This created a huge repatriation of capital from companies (mostly tech) harboring funds overseas, and capital was used to pay off debt, buyback stock and to some extent pay executives a nifty bonus. And while the benefit, in my opinion, could’ve taken the rate down to 27% with a comparable positive effect on the markets, the additional capital came in very handy during the pandemic. In fact many companies have ended stock buybacks, some reduced dividends indefinitely, and nearly all have made public commitments to  spending more for workers and the communities they live in, all due to the pandemic. So, a hike in corporate taxes for the wealthy, whoever that represents, is probably also inevitable, and in today’s egalitarian environment a number of high profile billionaires have expressed pleasure at being taxed higher. Finally, as far as capital gains tax hikes are concerned, in normal times this would be an issue for the markets. But as times have changed in consumer behavior, so too has it changed with investor behavior. With the introduction of free commissions, declining advisor fees and the tax indifference of robo-advisior platforms, the notion of buy and hold has been declining in popularity. So, although there are still automatic buy and holders, Algochums won’t be impacted and certainly the Pindudes won’t care, and to some extent neither will the market.


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