In a Nutshell by Ken Herman



One of Wall Street’s Biggest Fears

"While some unfortunate Americans may still be in bad financial shape in the aggregate, Americans have become a nation swimming in liquidity."

The headlines that everyone feared crossed the tape in the middle of last week, when it was reported that a resurgence of COVID-19 cases was hitting Texas, Arizona, Florida, and California. That unwelcome news offered a motive for some aggressive profit-taking in equity markets. And Wall Street expects volatility to continue. The key data point investors seem laser focused on now is the rate of new hospitalizations. If this data remains relatively stable, and death rates continue to decline in the USA, the bears may have to go back into hibernation until some other market-rattling headline triggers the overnight futures market. (Note: It should be expected that as COVID-19 testing continues to expand in the USA, many more cases will be confirmed, but America’s death rate should also continue to decline.)

Bloomberg Economics waved goodbye to the V-shaped recovery and hello to a U-shaped recovery. One issue is the rising number of confirmed COVID cases, potentially threatening more economic reopening and a return to normalcy in the entire country. Unfortunately, some blue state governors likely will continue to look for excuses to avoid a complete reopening for businesses until after November elections. One specific concern (noted by Bloomberg News) is that consulting firm Allen Andrews and Associates estimates 10% of the 22 million restaurants worldwide will go out of business before September, while an additional 20% or more will go through a restructuring process. OpenTable estimates the failure rate will be even higher. “Another wave of China’s originated pandemic may take the numbers higher in the absence of further bailouts.”  Restaurants employed 15.6 million Americans before COVID.

In the meantime, there will still be plenty of economic charts that look V-shaped, as the economic restart from almost nothing suggests that rapid increases in employment and activity should be expected (at least in the near-term). We saw it in employment and retail sales earlier this month. Nevertheless, Wall Street apparently agrees with the Bloomberg Economics diagnosis: What started as rapid recovery is likely to stall if people don’t feel safe (which is what I am hearing from friends in virus resurgent states). Ongoing Antifa / BLM civil unrest is also not helpful to the economy! Hopefully sane minds will prevail, and that lawlessness can be significantly reduced.

One phenomenon of COVID-19 (that we are starting to see) is the beginning of the Great Savings Release. Due to store closings while most of us were still working (or at least being paid), plus up to $10 trillion in stimulus from the Federal Reserve and Congress, most American’s are overflowing with savings. The personal savings rate skyrocketed from 8.2% in February to a record 33% in April, as the national piggy bank bloated from a lean $1.4 trillion in February to $6.1 trillion in April. That money was frozen in April, since stores were mostly closed and the IRS said, “Please don’t send us money on April 15. Please delay your taxes until July 15.”

While some unfortunate Americans may still be in bad financial shape (due to suddenly losing their jobs, or not receiving unemployment or stimulus checks in a timely manner) in the aggregate, Americans have become a nation swimming in liquidity. Millions of households are sitting on a pile of cash, which has helped fuel a “V-shaped” (50%) stock market recovery. This cash could also fuel a similar (but potentially slower-motion) V-shaped economic recovery during the second half of 2020 (assuming we elect to spend more of our saved money).

One reason that the stock market has been so resilient is that the Fed allowed the 10-year Treasury bond yield to rise from 0.66% to 0.91% in the first week of June. Although the 10-year Treasury bond fell to as low as 0.652% in a day last week, many fixed income investors were spooked by the fact that the Fed allowed Treasury bond yields to rise in early June. As a result, more fixed income investors are turning to dividend paying stocks (because they could lose a lot of current value in bonds if long-term Treasury yields continue to rise).

Until the larger issues play out (namely realignment of relations with China and the November elections) the market will likely absorb most of the other risks as not nearly outweighing what the Fed is currently doing (including what Fed Chair Jerome Powell has promised to keep doing).  As of last week’s press conference it was confirmed that there won’t be any increases in interest rates until 2023! What a grand promise, especially benefiting the equity markets!