Last night, between the time my head hit the pillow and when I finally fell asleep, I wondered how much longer stocks could rally despite the amazingly awful economic data. To be sure, the US markets were negative yesterday and are today, but April was the best month for US equities since the mid-70s or something crazy like that.
Admittedly, a snap-back of some variety was in order after the panic selling in March. However, when push comes to shove, I will borrow a line from Alan Greenspan and say there was some ‘irrational exuberance’ in the markets last month. 30 million out of work since the middle of March? (4.8%) GDP for 1Q? Negative oil prices? All time lows or drops on many, if not most, economic releases? “Fiddle dee dee. Ashley Wilkes told me he likes to see a girl with a healthy appetite.”
Okay…okay, I get it. The Federal Reserve has supposedly given a ‘blank check’ to the markets, and Washington is tripping over itself to throw money at the problem. The only issues are just how much, to whom, and is there any more?
Even so, at some point, reality has to set in, doesn’t it? Simply throwing money at a problem doesn’t always make it go away, does it? What is the old expression? The road to hell is paved with good intentions? Won’t there be unintended consequences? Just because the money was ‘supposed’ to go here instead of there doesn’t mean it did, right? People don’t always do what they are supposed to do and the devils in the details, wouldn’t we all agree?
Regardless, everyone knows you ‘can’t fight the Fed.’ Also, states are reopening their economies, at least to some degree. Georgia Gov. Brian Kemp just reopened tattoo parlors and bowling alleys. Ha. Alabama Gov. Kay Ivey partially reopened so-called non-essential retail stores and beaches. Again, ha. Wait, am I being a downer? Looking at gift horses in the mouth again? Complaining the free beer is too cold? These should all be good things, shouldn’t they?
I suppose there is some truth to just about everything in those last two paragraphs.
Now, being a Southerner, I am inclined to explain things in analogies and hyperbole. While that might not be a uniquely Southern trait, if you have ever listened to someone from south Alabama tell a story, you will know ‘we’ are good things other than playing college football and frying chicken. To that end, while I consider myself an Alabamian, my parents are both Marylanders, and I would submit creative storytelling is not one of their, um, more Southern traits.
So here goes my little story, analogy, about the recent behavior in the markets.
Have you ever dreaded going to a social event? Perhaps it is the crowd, the timing of the event, or even a scheduling conflict. It doesn’t matter the reason; you just are NOT looking forward to it, and half drag yourself up the steps to knock on the door.
Once inside, you find the ambient music and the crowd are both okay, better than you had expected. You don’t see any food anywhere, but there are large punchbowls on every table. So, you pour yourself a glass of whatever it is and…SAY…it is good. I mean it is really good. So good, you throw the first one back much quicker than decorum would allow. The next one goes down almost as easily, and it isn’t until the third when you start feeling the alcohol. You couldn’t taste it previously, but no matter. The music has gotten a little louder and the place is jumping. What the heck? It’s a party, right? Why not pour another glass? Indeed.
Time seems to drown in a sea of booze, as the host replenishes each punchbowl as soon as it empties. Spiked punch and more spiked punch. Punchbowl after punchbowl. As though through a kaleidoscope, the music and conversation get louder, a riotous cacophony, and events begin to spiral out of control…delirium. People collapse on the furniture and fall to the floor; their livers no match for the event’s abounding generosity of, shall I say, spirits. No one has seen, let alone touched, the unappetizing, if not inedible, food on the buffet which the host has been trying to hide. The logic is both simple and base: ‘tis better to get your guests inebriated if you can’t get them fed.
Regardless, the pleasure of the evening’s festivities will be insufficient recompense for the thumping headache in the morning.
There you have it. That about sums it up, not that I have been to a party as raucous as that one, or close thereto! No way! I spend weekends with my hands folded neatly on my lap and all of that.
In all seriousness, there is a lot of seriousness to that analogy. Obviously, the host here is the Federal Reserve. The never-ending punchbowls represent the massive amounts of liquidity the powers that be are throwing at the financial markets and the economy. The partiers are investors, and the inedible, unappetizing food is the current economic data. The implied hangover in the last line is the feeling we could very likely have at some point, if not many, this summer.
To be fair, the 1Q 2020 earnings season hasn’t been a complete disaster, really. Those companies/industries everyone thought would get rocked did so. Conversely, tech companies, by and large, posted some decent results. Even some of the vertically integrated oil companies, somehow beat expectations. In aggregate, it could have been worse. In fairness, we DID have reduced expectations…a different definition of success, if you will, for the 1st Quarter. Besides, the US didn’t truly go into lockdown until March, after much of the quarter was already in the bag. The big question market is, and will be, just how bad will 2Q 2020 be? That is the big one, and there are numerous smaller ones.
Right now, no one really knows just how bad the markets well be because corporate America isn’t giving investors much guidance. Its crystal ball is just as murky. Then there are the unknowns and what if scenarios. What happens after we ramp up testing AND realize a lot more folks have COVID19 than we originally thought? What happens if we see a resurgence in cases in those states which have opened up their tattoo parlors and bowling alleys? Small joke that. What happens if the SBA gets really granular, bureaucratic and tough on PPP forgiveness? What happens if a much larger than expected number of PPP borrowers DON’T use the funds as proscribed and/or intended? What if some of them simply vanish in the night? What if employers get sued for opening back up ‘too quickly’? What if banks get sued for not processing so & so’s PPP loan in a timely manner? What if people waste their $1,200? What if people stay on unemployment insurance longer than expected since the benefits have been increased dramatically? What if employers can’t find unskilled and semi-skilled labor as a result? What if the new normal is a 10% Unemployment Rate for the foreseeable future? What if it is 7-8% with a much lower Labor Force Participation Rate? What if COVID19 mutates? What if warmer weather doesn’t slow this particular coronavirus? What if we somehow find out the truth about China’s data and begin to freak out at the truth? What if food distribution networks start to fall apart? What if creating money out of thin air, backstopping the markets at all cost, and bailing out everyone and everything ends up with ironic consequences? Namely if the government removes the risk of investing, what is the likelihood of long-term return? How will that impact the allocation of capital?
I am tired of peeling back all of these layers of onion. Whew.
When I awoke this morning, I checked the futures market on my phone, as I always do. It was red, and today has been pretty bad. So, going back to the original question I had, how much longer stocks could rally despite all the amazingly awful economic data? You know, April was a bit much, as was maybe March…at least the level of panic. Perhaps we are now in some kind of lala land, otherwise known as a range. Perhaps this summer will be choppy. Perhaps we will see volatility. Perhaps the good news evens out the bad. Perhaps investors become a little bipolar over the next several months or, better put, stay that way.
Maybe will we chalk up the first two quarters of 2020 as one of the more interesting and frustrating times of our lives. A time when we spent more time with family, even as we were supposed to spend time apart. When we spent a little more time reading and doing and a little less time watching. When we found we really do kind of like cold cereal and (dare I say it) Kraft Dinner. When we went on walks and rode bikes more than we had. When the jigsaw puzzles came out and never went back. When we found we like to cook more than we thought we did. When we, perish the thought, realized we didn’t miss professional sports as much as we thought we would. When we changed the definitions of office, workspace, and work itself. When we realized we were living through history and a time which forever changed how we live our lives and conduct business. When we, in the not so distant future, realize it was for the better.
The market values will eventually come back, even if it WILL be a roller coaster ride. More importantly, the sun will come up in the East in the morning, and realize, out there, somewhere, someone loves you. COVID19 be darned.
Have a great weekend.
John Norris
Chief Economist
As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.