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Vaccine Hope Wrestles with Economic Crawl Back

May 25, 2020
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Monday Morning QB - Market Observations:

  • Vaccine Hopes Give Rise to Stock Market at the First of the Week
  • Economic Data Fizzles the Rally to End the Week
  • Lockdowns Loosen as All 50 States Have Eased Restrictions in Some Way
  • How Will Consumer Behavior and Businesses Respond?
  • Federal Reserve Meeting Minutes Show Grim Economic Outlook and the Need for Fiscal Stimulus
  • Fed Enlarged Their Bond ETF Purchases Showing They Are All In -” Whatever it Takes”
  • Weekly Job Losses Continue to Decline from Record Levels, But a Whole Lot of Americans Are Filing for Unemployment Each Week
  • Unemployment Claims Likely to Reach 40 Million
  • Oil Rebounds On Demand Hopes and Capacity Cuts
  • With All the Economic Uncertainty, Stocks Still Pricing in “V” Shaped Recovery
  • “When We have a Vaccine” – Is the Answer to All Our Questions and the New Talking Point

Monday Morning QB - Market Performance:

Vaccine hopes helped to lift stocks for the week. The S&P 500 index hit its highest level since March 6 before falling back somewhat.

The Dow Jones Industrial Average rose 3.3% to close at 24,465. The technology-heavy NASDAQ Composite, likewise, added 3.4%.

The large-cap S&P 500 added 3.2%, while the mid-cap S&P 400 and small-cap Russell 2000 were way out front, surging 7.4% and 7.8%, respectively.

Vaccine Progress Started Last Week Off with a Market Rally

The one thing missing in all our conversations around finding our "new normal" post-virus is a vaccine.

What a different "new normal" we will have when deaths from the virus can be removed from the equation with a dose of _____ (fill in the blank)- once discovered and approved by the FDA.

The stock market has rebounded based on “Less Bad News” is actually "Good News". The thought of getting back to normal faster than predicted with millions fewer American deaths has been enough to claw back much of the losses from March.

However, to get us over the next hump and break out of the trading range we have been stuck in will likely come from a proven vaccine winner. To this point, we have seen rallies that were based on "promise" give back those same gains when underwhelming clinical trial performances were announced.

Hope and expectations have run ahead of results.

The current stock market success only has staying power in continued declining COVID-19 cases along with news of progress towards a vaccine.

This current market rally is certainly NOT a house made from brick.

Which Leads Us to the News of the Week from Moderna

We all want a weapon with which to fight the coronavirus, and the company that gets there first stands to gain profit and worldwide recognition.

Drugmaker Moderna is the latest company to give us hope. A week ago Monday, Moderna released early results from their first human trials.

I am not a scientist, and staying in a Holiday Inn Express did not help my struggle in trying to understand some of the reports I read regarding the trials. Suffice it to say, the sum of the parts offered a promising sign regarding one of the vaccines currently in development.

If trials continue to break in the right direction, the vaccine could be ready for emergencies by early Fall. The first phase began in March. Phase two started in early May and was given the fast track designation by the FDA on May 12th with the third phase set to start in July. The end of the third phase will conclude with thousands of people having been tested using the vaccine.

Let us all hope that this vaccine can run the gamut of trials to a successful conclusion.

Without a vaccine, I am not sure any of us will feel comfortable at large gatherings. An important unanswered question at this point is, “How much will the drug cost?” TBD

A comforting fact centers around vaccine testing and development worldwide.

If Moderna does not find the answer with their drug, over 100 other coronavirus vaccines are in development worldwide.

There WILL be a vaccine; it is only a matter of time! The stock market is betting on it.

Rally Continues Based on Federal Reserve Action and Less Bad Economic News

As we all wait for an effective vaccine, the economic data continues to improve coming from the depths of the pit, but we are still a long way away from a healthy growing economy. Again, "less bad" data has taken over as "good news".

Investors have given a hall pass to poor earnings results combined with companies foregoing future guidance.

Earnings per share is a problematic metric when companies are not telling us what their earnings are or will look like going forward. With little information on the earnings, some investors are relying on price-to-book value to determine over or undervalued stocks.

Book value has a subjective element in the formula, as well as multiple available methods of calculation. Intrinsic value can be hard to determine. For example, how much value is the Nike swoosh?

Do your homework if your new investment strategy going forward emphasizes book value.

Many investors are buying up stocks based on the lesson from the Great Recession – “Don’t Fight the Fed.”

The Federal Reserve, throughout the financial crisis of 2008 – 2009, basically put a floor under the stock market. If the economy showed distress, they enacted a new policy or enhanced existing policy to keep the economy off life support.

The Federal Reserve measures in place already dwarf the action of the Great Recession Federal Reserve - with more to come, according to Chairman Powell.

So far, the Federal Reserve and our Government have provided never seen before rescue packages to help stabilize the economy. The emphasis going forward is on a vaccine and economic stimulus. The stock market, in general, has responded with a nice rally.

Not All Stocks and Market-based ETFs/Mutual Funds Will Be Winners

The question turns to- What if consumers and businesses do not go back to "normal" as we know it and the "New Normal" is permanently reduced economic activity due to social distancing?

This question is essential to contemplate. If this is the case, the overall stock market may move higher, but it will likely do so on the backs of fewer companies.

There will be winners and there will be losers. The consumer will pick the winners by their actions.

As we reopen, where will consumers go out to shop, to eat? Will we travel and to where? What can we live without? What do we, the consumer, deem essential?

I love supply and demand. It is the oldest economic and stock market truth! Follow the money.

The “New Normal” in our practice will- and already has- emphasized stock selection. There have been definite winners and losers so far in the recovery.

At the beginning of May, we enacted a supply and demand based stock model. Our model will hold the seven top S&P 500 stocks that meet our criteria. We have been cautiously selective with the stocks we like, preferring those that are still able to provide earnings information—for example, the electronic chip maker Nvidia.

Any company that makes life at home during our lockdown better is worth consideration.

Nvidia (NVDA) showed a year over year increase in earnings, sales, and revenue as well as sharing forward guidance. I think my favorite stat from their earnings report was a 50% increase in hours spent on their gaming platform. (I know my kids have pitched in on this one.) Should the New Normal continue to be a work from the home world, Nvidia will likely still be a winner.

Yes, for disclosure purposes, we own Nvidia in our model. The companies we have in our models have been able to continue to report their numbers.

We like stocks that can show results over stocks that are asking for a quarter or two reprieve from sharing what is going on "under the hood".

To continue the car analogy, we are avoiding stocks with the check engine light on!

If you would like to know more about our stock model, email or call us, we will be glad to discuss it with you.

Stay Safe and Have a Wonderful and Reflective Memorial Day!

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
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