Laidlaw “A Brighter Future” Podcast
1. Putting together this week’s episode, I was reminded of the famous opening paragraph from Charles Dickens’ novel, “A Tale of Two Cities,” – “It was the best of times, it was the worst of times” and I think our listeners would agree. On the “best of times” front, we had the major averages all positive for the week with the NASDAQ leading the pack up over +6% (+16.6% over the past 2 weeks), followed by the S&P 500 with a gain of +3% (+15% over the past 2 weeks) and the Dow up +2.2% (+15.2% over the past 2 weeks) while on the “worst of times” front, we had another unemployment claims report in excess of 5mm, bringing the 3-week total to over 22mm, March 2020 retail sales plummeted to worst ever on record, industrial production dropped to the lowest level since 1946 and there were dismal earnings from firms like JP Morgan, Goldman Sachs, Schlumberger Rite Aid and Bank of America.
What’s your take on this market? Is this a “bear market” rally and if so, should investors consider some de-risking here?
With the S&P 500 up +28% since the March 23rd low and the rally in tech sector mega-cap names ensuring the Nasdaq 100 is no longer down for 2020, this is more a time for investors to look opportunistically at the dislocations that have taken place in the securities market. A well-known institutional investor, Oaktree Capital founder Howard Marks, made a very salient point in this regard in his 3/31/20 investor letter, “waiting for the bottom can keep investors from making good purchases, so the investor’s goal should be to make a large number of good buys, not just a few perfect ones.”
That said, please recognize we are in the midst of a corporate earnings reporting season where many companies will take the high degree of uncertainty as a chance to say that they aren’t able to give guidance, something that normally would be anathema to Wall Street. At this time, however, we believe investors should look more to two factors that together are constructively supporting the market upturn here: 1) the developments taking place around containing the spread of the COVID-19 Coronavirus (“COVID”), and 2) the extent and timing of the fiscal & monetary policy response to alleviating the economic impact of COVID.
2. On past episodes, you have shared the importance of paying attention to economic indicators to give you an idea of where the market and economy are headed. I’d like to make this a two-part question, First why were the three reports (i.e. retail sales, industrial production & the Empire State manufacturing survey) so are important? Second, I think many people hear the terms – leading indicators and lagging indicators. Can you share with our listeners the primary differences and what you focus on?
The importance right now of the economic data is that they demonstrate just how devastating the impact of COVID has been. The sudden nature of the economy’s deceleration is something to behold and its impact is being widely felt. While production data is important, we all know that supply follows demand. In this regard, retail sales plunging -8.7% in March 2020, the biggest decline since the U.S. government started the monthly data series in 1992 (after falling by a revised -0.4% in February 2020), gives a stark indication of the cliff the U.S. economy just fell over. With consumer spending providing 70% of the U.S. economy, the retail sales number clearly spells out the magnitude of the deceleration as demand evaporated in the face of COVID across a range of sectors.
Note nevertheless that while COVID is destroying demand in the retail sector it is also serving to accelerate shifts in the channel. For example, U.S. e-commerce spending is up more than +30% from the beginning of March 2020 through mid-April 2020 compared with the prior year period, according to market research firm Rakuten Intelligence. Along with the overall boom in e-commerce spending, sales data show consumers have shifted their focus to entertainment products (e.g. books, games) reflecting the new normal of life in quarantine.
As investors we are always trying to look ahead. The stock market tends to anticipate events roughly 6 months ahead. Relative to leading versus lagging economic indicators, it is interesting to note that retail sales along with the S&P 500 index are two of the ten data series used by The Conference Board in constructing its Leading Economic Index. Lagging indicators primarily confirm what has already happened and so may not offer as much informational value. In this regard, the March 2020 retail sales report was the deer that just came through the windshield.
In terms of the economic indicators I rank as most important right now, the one data series available with the greatest frequency is the weekly U.S. unemployment claims report released at 8:30amET every Thursday. The fact you mentioned earlier that 22mm workers have filed for unemployment in the last 3 weeks is staggering. Bear in mind that the U.S. workforce was at a high of 164.6mm in February 2020, so 13.4% of that total is now unemployed. COVID is taking a severe toll.
3. If you don’t mind, let’s stay on the topic of the economy – I have heard more than a few people raise the prospect that all of these Fed dollars and spending programs will, eventually, be inflationary. Is that something you’re concerned about and if so, how should our listeners be positioned to best take advantage of that scenario playing out?
With WTI oil prices trading at $14/barrel, I do not expect that investors will have to be concerned about an energy input price lead inflation spike anytime soon. However, seeing as more than $8tn of fiscal and monetary stimulus (9% of 2019 global GDP) has been added to the global economy with the onset of COVID, it is appropriate to consider whether this may have long-run inflationary consequences.
There is a market-based means of tracking this, namely, Treasury Inflation-Protected Securities, or TIPS, which are securities whose principal is tied to the Consumer Price Index (CPI). The principal increases with inflation and decreases with deflation. So far in 2020, TIPS have appreciated +3.4% and were at their March 6th high up +5.7%. Note that TIPS have traded up to 5-year highs in 2020 and are back near the highs last seen in December 2012, so the market is attuned to possible inflation acceleration. Still, with substantial portions of the global economy under COVID lock-down, we do not see inflation in today’s real economy with the distinct exception of toilet paper. Near term, however, the additional liquidity provided by fiscal and monetary stimulus appears to have found its way into financial asset pricing, namely the +28% gain by the S&P500 off its March 2020 low.
Investors may wish to have some hedge against inflation. Historically, that role has been fulfilled by owning gold-linked securities. So far in 2020, gold as tracked by the SPDR Gold Trust (ticker: GLD) is up +11%, in the process outperforming TIPS. Either way, in this market, a positive return is something to be appreciated.
4. As we have discussed on previous episodes and in the “Laidlaw Five,” Healthcare remains a place where investment dollars continue to flow and this week we saw some exciting news on the COVID-19 front as Gilead Sciences reported positive results, albeit in a very small population, from their drug Remdesivir. In addition, as we touched on last week, there are 254 clinical trials testing treatments or vaccines for the virus, many spearheaded by universities and government research agencies, with hundreds more trials planned. But I think our listeners would be interested in your thoughts on the topic discussed recently by Barron’s that Healthcare will be going Digital with things like Teledoc. To me, in addition to the disruption of how we work every day, do you think how interact with our healthcare providers will alter radically as well?
During COVID, the shortcomings of the healthcare system in terms of items such as personal protective equipment (“PPE”) have highlighted the need to be able to deliver healthcare services remotely, a development clearly serving to bring forward the transition to digital in healthcare.
In NYC, for example, at Mount Sinai Health System, the hospital started treating patients from outside their negative-pressure rooms to minimize times workers had to enter: nurses monitor ventilators remotely, and doctors call patients on tablets via Zoom to conserve PPE. Separately, Mount Sinai data scientists built artificial intelligence tools to speed discharges. A program scans a patient’s medical records, combing through blood work, vital signs and temperature readings to determine who can be sent home in the next 72 hours. Through raw ingenuity, it was developments like these that allowed America’s beleaguered health system to remain afloat throughout the COVID crisis.
With a new-found appreciation for how technology can be better integrated into how healthcare is delivered and public health monitored, investors can expect to find innovations coming forward during the COVID crisis. One important long-term consideration is how the trade-off between public health and personal privacy is managed as substantial amounts of personally identifiable information will be gathered in the process of COVID testing, tracing and tracking. Data anonymization techniques will be required in order to uphold such newly introduced standards such as GDPR and CCPA. Stayed tuned for developments in this area.
5. On Thursday night last week, the White House outlined broad new federal guidelines for opening up the country that will put the onus on governors to decide how to restart the economies in their states amid mounting fallout from the coronavirus outbreak.
The guidelines outline a three-phase process for opening up the country based on the scope of the outbreak in individual states and also don’t suggest specific reopening dates. Instead, they encourage states to base their decisions on data. It seems like this is a good “first step” at getting people back to their lives, careers and schools. Setting aside personal political opinions, could you address the plan and give us your thoughts on how this could be good for the macro-economy and the markets?
First off, it is critical to recognize that no restart plan can stand a reasonable chance of success without having sufficient testing resources in place, something that arguably will require federal government support to state and local governments that have been fiscally hard-hit by COVID.
Looking at New York State, for example, Governor Cuomo said over the weekend that with a $16bn budget deficit that spending levels in public hospitals may need to be cut by -50%. A federal plan to reopen the U.S. economy that delegates responsibility to the state governments without providing the necessary aid and support is doomed to failure from the get-go.
Second, this is a critical time to distinguish between necessary social services and discretionary personal services. The need to educate our children, to allow college and graduate students to complete their degree programs is a necessary part of the human capital formation that will drive the U.S. economy over years. The unavailability in the re-start program of safe, secure and reliable childcare programs in an economy where one in three jobs held by women has been designated as essential work puts a substantial portion of the population at risk and likely serves to deter labor participation by placing unacceptable barriers in the way.
Federal government support for testing, safe day care centers and educational institutions is critical. Arguably, other more discretionary services such as restaurants and movie theaters are going to have to wait. In this effort, the federal government is going to have to lead from the front, not to set up the states for failure, especially those states that have suffered the brunt of the COVID crisis and paid the price in full.
6. As we close out this podcast, I would be interested in your thoughts on the return of some of the major sporting events. The NFL Draft will be occurring this week on-line, but the PGA, NBA and MLB all appear to readying a return, sans fans, in the next few weeks. Do you think it could be a great morale boost for people to watch a baseball game, basketball game or golf tournament instead of re-reruns of the ’85 National Championship (which, by the way, Villanova still wins)?
We welcome the return of sports for the inspiration they offer us all of human achievement, of individuals on their own or by coming together as a team overcome challenges and triumph over adversity. Together we will get through this, no doubt, and, with the return of sports, it is going to take some balls to do it. That said, let’s play ball!