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The New Economic Reality - The "Swoosh" Recovery

May 17, 2020
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Monday Morning QB - Market Observations:

  • Swoosh Recovery Predicted to Be Our New Normal
  • The Swoosh Recovery Suggests a Long Road to a Full Recovery
  • Retail Sales Drop 16.4% in April
  • Unemployment Claims Balloon to 36.5 Million
  • Filings for Unemployment Benefits Declined for a Sixth Straight Week…However, Claims Continue to Run in the Millions
  • Reopening Fears Take Center Stage as 33 States are Coming Out of Their Cocoons
  • Will the Reopenings Lead to a Large Rapid Spike in the Death Tolls?
  • Under-discussed Problem of Mental Health Issues from the Lockdown Starting to Surface
  • Many Unknowns Left to be Answered

Monday Morning QB - Market Performance:

The major U.S. indexes retreated as investors reacted to the new “Swoosh Recovery,” which points to more bleak economic data and further potential weakness ahead.

The Dow Jones Industrial Average declined 646 points to finish the week at 23,685—a decline of -2.7%. The technology-heavy NASDAQ Composite retreated the least, at -1.2%.

By market cap, the large-cap S&P 500 gave up -2.3%, while the mid-cap S&P 400 and small-cap Russell 2000 fell a much larger -5.8% and -5.5%, respectively.

Economists and Fed Chairman Powell Warn the Recovery Could Be Slow

To start, if the existing letters of the alphabet are not good enough to describe our current situation, then we really are flying blind in terms of what the recovery will be.

I have a degree in economics and have studied V-shaped, L shaped, W shaped, and even Z shaped recoveries. All previous recoveries have followed along one of these shapes.

The reality of our current situation is that none of these shapes meet economists’ expectations for our current and future reality. Economists have described the coronavirus pandemic as a hard drop followed by a slow, painful recovery. The alphabet letters do not provide a shape to match the recovery description.

However, there is a symbol that exhibits the aforementioned economic attributes – the Nike “Swoosh”.

We have provided a picture of the Swoosh in case anyone cannot remember the look of one of the more famous logos on planet Earth.

“It’s gotta be the shoes, Money” was the famous Nike commercial starring Spike Lee and Michael Jordan that put Nike on the map. (Google it if you want a reminder.)

I remember my first pair of Nike sneakers, a fond childhood memory of blatant consumerism! In my defense, I had not studied finance yet!

So why will our money, the economic fallout from the virus, perhaps look like the shoes?

Effects from Social Distancing 

One reason is social distancing. No one knows for how long social distancing will last. Some are predicting that social distancing will never entirely go away.

Social distancing means fewer people allowed on planes, trains, buses, subways, or in restaurants, retail stores, parks, beaches, ski resorts, cruise ships, casinos, theme parks, etc. … Can an airline make money if flying at 30% capacity? Can Disney make money if the theme parks operate at 60% capacity? Can Best Buy survive, letting only 50% capacity in the store at any given time?

Can you imagine the effect of these rules on “Black Friday”, the busiest shopping weekend of the year? Of course, we are assuming people will go out to Christmas shop. In a poll by Coresight, more than half of the respondents plan to cut back on spending during the upcoming Christmas season. Retail has already suffered, now you are going to take away Christmas too?!

Precisely what will our country look like in three months, six months, 12 months, or 18 months? No one knows. Although I have heard plenty of so-called experts willing to predict the future.

I do not care how smart you are or what you think you know- no one can predict the future.

This virus has been compared to weather events and other natural disasters, as well as previous recessions and other pandemics. The problem is none of these events involved so many factors happening simultaneously across the globe!

Not to mention, roughly 36.5 million Americans have applied for unemployment benefits over the last eight weeks. (more on this later)

Federal Reserve Chairmen Powell’s Somber Outlook

One of the most influential economist in the land weighed in to share his thoughts on the recovery. Chairman Powell sounded the alarm, describing the potential economic fallout as “highly uncertain and subject to significant downside risk.” I guess he did not feel like mincing words.

Chairman Powell went on to say that, “There is a growing sense that the recovery may come more slowly than we would like, and that may mean that it’s necessary for us to do more.”

It sounds like a “Swoosh” recovery to me. "Us" refers to the Federal Reserve, as well as the White House and Congress. Let the stimulus debate and the debate surrounding the effectiveness of negative interest rates begin.

“Less Bad” Constitutes Good News these Days

Workers applying for unemployment benefits totaled 3 million for the week. Since the pandemic took hold of the U.S. economy, 36.5 million people have filed for unemployment. These numbers are simply mind-boggling!

However, some good news is that the weekly claims are down significantly from their peak of 7 million.

As some states have begun to reopen, the states (not all, however) have experienced significant drops in people filing for unemployment. This is a trend the stock market can appreciate.

Retail Sales – the Latest Measure of the Deep Economic Hole We Are In

Sales at U.S. retailers collapsed due to the coronavirus's “shelter in place” orders. Retail Sales shrank a record -16.4% in April! Nearly all categories dropped by double digits.

As we continue to make the transition from our RS Wealth Management office to our new Hayden Royal office, maybe a mile apart, we have made several trips to Lowes and Home Depot. No matter what time of day, the parking lot is full. So, if any of you are doing home projects, you are certainly not alone.

The best of the bad retail numbers came from the building materials and garden supply stores.

Mike and I were talking with a friend. Part of his job is to approve home projects for multiple homeowners' associations, and he shared he has never done this many approvals in a month in his entire career.

Good for all of you stuck at home turning lemons into lemonade.

I will take it as a sign that as we reopen the economy, the less affected people will be spending money again, and more people will come off unemployment each week. Then, the bad economic numbers will get less bad with each passing month.

We can only hope this is the case, and, so far, the stock market is counting on it.

There Will Be Winners and Losers

“Buy and Hold” will likely come under some scrutiny during the “Swoosh” recovery, after all, choppy markets combined with real pullbacks will be hard for the average investor to accept psychologically.

Fear of losing money is a powerful motivator after a recent deep dive in losses. Investor discomfort typically ends in the average investor running for the exits.

The inference from bad pockets of stock market returns will likely be “here we go again.”

General market ETFs and Mutual Funds will also struggle should the returns come from select pockets of the market, which has been the case in this recent stock market run-up.

All of this emphasizes risk management systems that include individual stocks and sector-specific ETFs and Mutual Funds.

A new type of recovery may require a new way of thinking about how we invest.

(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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