In a Nutshell by Ken Herman

There is no doubt that rising coronavirus cases are starting to impede commerce again. Many states have mandated masks in public places in an attempt to avoid reversal of the gradual business and social reopening process.  If there is any good news associated with Covid-19 it is that most young people have proven to be asymptomatic or quick to recover from what to them is generally a non-life-threatening illness.  It also should be encouraging that hard lessons learned about protecting the older and most vulnerable Americans should avoid repeating mistakes which resulted in a few states still having Covid-19 death rates over 6% (for those tested positive for the Wuhan coronavirus).

As expanded testing discovers more people infected with the Wuhan Coronavirus, the death rate as a percent of infected people continues to significantly decline. There are already 15 states where the Covid-19 death rate (per verified case) is less than 2%.  However, the USA’s overall Coronavirus death rate is still near 4.5%.  A few Eastern states keep it that high (only slightly below the world wide Covid-19 death rate of over 4.6%).  Specifically, New York, New Jersey and Massachusetts combined account for 42% of all of our country’s Covid-19 deaths!

Coronavirus hospitalization rates have recently risen in some new hot spots, like Houston, Miami, and Phoenix.  However, there is no sign of hospital capacity concerns which would require returning those states or cities to lock downs or much stricter social distancing.  So, while we are not out of the Coronavirus woods yet, it is unlikely to see a return to draconian government restrictions which crippled America’s economy this summer.

If you had asked me in early March if 20 million people could still be out of work by the end of the second quarter, while stock averages would hit a fresh all-time high in June, I would have told you that you might be missing some marbles. But the Fed flooded the financial system with so many digitally printed dollars that more than a few of those electronic greenbacks found their way into the stock market.

However, the Fed may have freaked out the financial markets late last week when they ordered banks to preserve their capital (by not raising their dividends, and while also suspending stock buy-backs).  Specifically, the Fed told banks that they cannot pay out any dividends that exceed their average quarterly profits in the four most recent quarters.  To admit there has been a negative impact on normal banking conditions (from Covid-19) is an understatement, but were these limitations really needed?  Even though many big banks had already agreed to suspend stock buy-backs during the second quarter, the Fed also barred all banks from any stock buy-backs in the third quarter.  The Fed said that limiting shareholder payouts would help keep banks healthy during what could be a prolonged recession.

Unfortunately, investors will have to wait for earnings season to reveal just how good or bad business conditions have been within the banking sector.  But the Fed’s actions last week suggest they aren’t liking what they are seeing.  That’s why those tempting 4% to 8% past dividend yields (regularly thrown off by many of the leading mega and regional bank stocks) might not be as likely, and should not be expected for the time being.  There are plenty of other places to go in the stock market for dividends yielding 3% to 5% that should be “good money” now and for the foreseeable future.  Buying bank stocks that are being deeply discounted right in front of earnings season is, in my view, one trade to pass on.

The bottom-line question that many investors are now asking is: What does the Fed know that the stock market does not know? Is there now a more serious risk of a prolonged recession?  Clearly, prolonged coronavirus possibilities could delay a full economic recovery (which remains on the minds of all investors).  When markets go almost straight down or straight up it is like the forced stretching of a rubber band. Eventually it snaps back. We witnessed extreme selling, which snapped back to extreme buying, which now most likely needs to snap back to some lower level. The very first hints of a turning tide are here. History suggests lower market prices are just over the horizon.