Memorial Day: Warriors of "New War"

In US last Monday of May is  observed as Memorial Day to remember the soldiers who had fallen while serving in US Military. Its somber day to remember the men and women who gave their lives to protect the freedom and security of Americans and all the people of free world. This year world is fighting a new war against invisible enemy. So in addition to fallen soldiers, let's also remember the new warriors!

• People who lost their lives prematurely due to COVID-19 infections
• Healthcare professionals who are fighting the war against the COVID-19 virus
• Economists and policy makers who are working non-stop to limit the economic damage caused by lockdowns
• Small businessmen who are fighting for survival of their small businesses while protecting employees who work for them
• Teachers who adopted to remote teaching to make sure that their students continue to get educated 
• Class of 2020: The seniors who are graduating this year are missing one of their biggest celebrations in life of graduating from high-school or college. All the congratulations, celebrations and parties have moved to virtual. There is no "Walking". I am proud of Class of 2020 that they have adopted to virtual graduation celebrations for larger good of containing the spread of virus.
• The researchers who are working frantically to find the new and faster ways of testing, cure and vaccine
• Big companies who are looking after their employees and communities
• America is fortunate to have "General" Powell who is leading the war on economic damage to avoid another depression and "General" Dr. Fauci who is guiding the policymakers regarding balance of saving lives (against virus) and livelihoods (against lockdowns)

Despite all the bad news about spread of virus (closing on 5 million infections) and deaths caused due to COVID-19 (reaching 400,000) and depression era economic reports (40 million unemployed, 20% unemployment, 40% GDP contraction), Markets seem to be looking forward to second half of 2020. After record breaking gains in Apr, markets are ignoring "Sell in May and Walk Away" mantra and inching towards milestones (DOW 25K, S&P 3K and Nasdaq 9500). Till now the markets were led by high-techs and cyclicals. In last few days, participation is widening with energy and financials companies participating in the upward movement. One should start looking into sector rotation from "WFH" companies to "Get Out" companies. That means sectors like energy, leisure, in-person shopping in malls, restaurants should start getting some attention. Many stocks in these sectors have gone up significantly over last few weeks. Many companies are declaring bankruptcies (JC Penny, Hertz, Neiman Marcus and more to come). The stocks of many established and large companies are still down by 40-60%. So if you can find the survivors from the debris, this could be once-in-decade opportunity to build long-term diversified portfolio.

That's all for now. Let's remember the fallen on this Memorial Day and fight the war on virus together!

/Shyam

Tale of Two Streets!

This week's blog is inspired by all time best historical novel by Charles Dickens "A Tale of Two Cities"   which is set between London and Paris during late 19th century. Dickens' opening sentence (source Wikipedia) below could be as applicable in today's historical time of world-wide pandemic!

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us......"

Last 6 weeks had shown the big disconnect between two streets - Main Street (Economy) and Wall Street (Markets). So let's look at some aspects of "Tale of Two Streets" with focus on US but is equally applicable to almost any country in the world.

Main Street:

• Over 30 Million unemployment claims in last 5 weeks. That's nearly 10 times of what happened  just after world war II ended in 1945
• It took 11 years to create over 22 million jobs since great recession of 2008-09. It took 6 weeks to lose 30 million jobs
• Unemployment report which would come out this Friday would see highest unemployment rate of between 12-20%. The economy went from best unemployment in 5 decades (3.5%) to worst unemployment in 90 years (since great depression)
• Q1 GDP went from forecast of plus 2-3% to close to minus 5% in matter of weeks. 
• Q2 GDP could be down by more than 25% - highest since great depression
• Major parts of economy is shut down across the nation (and world). Even during pandemic of Spanish Flu, this had not happened. That may be due to lack of information and global connectivity and may have caused 50 million death. This time policy makers were more informed and willing to shut the nations to save lives which is absolutely correct policy. As Modiji said "Jaan Hai to Jahan Hai" while imposing lockdown in India!

Wall Street:

• DOW had its best month since 1987 with double-digit gains. Same was applicable for S&P and Nasdaq
• Since Mar 23 lows, indexes are up by more 25%
• The worst performing sectors like Energy, transportations, leisure (many of these businesses are still closed) are up by 50-100% from their lows.
• The bear market lasted only for 3 weeks (Mar 9 to end of March) and possibly a new bull market had already started
• The tech stalwarts (like Amazon) are at or near all time highs in the most severe recession.

So one would wonder why there is so much disconnect between these two "streets"?

As Paul Krugman wrote in his opinion article "Crashing Economy, Rising Stocks" 

The Stock Market is not The Economy

But there is some logic to why markets are behaving this way. Here is my take on this.

• US FED: Most important factor is US Federal Reserve Bank's extra-ordinary, out-of-box, proactive and creative steps to support the economy (and indirectly markets). This time Fed is going all out without worrying about "moral hazard" since there is no sector/companies/humans (at least in US) to blame for this crisis (unlike dot.com companies during 2001 and financial companies during 08-09). These steps of effectively providing backstop to even junk-rated companies unfroze the credit markets and companies like Carnival to Boeing could raise billions of $$ in debt to survive and live to see another day! Markets know the saying 'Don't Fight the Fed" or "Fed is on your side" and reacting to these steps
• US Fiscal Stimulus: US Government (both houses of congress and White House) kept aside their differences as well as ideology and passed multiple rounds of stimulus totaling nearly $2.8 trillion and counting. And this was done at warp-speed and almost unanimously. More would come as the ravages of lockdowns spread throughout the economy in Q2. No other country had moved so fast to protect its economy and citizens from perils of economic pain
• American Magic: As Warren Buffet (always the optimist which is what I liked about him) said that America will come back stronger and wealthier over longer run and equities are best way to participate in the rebound
• TINA and FOMO: "There is No Alternative" and "Fear of Missing Out". In ultra-low to negative interest rate world, there are no other alternatives to put your money to work especially if some sound and safe companies (AT&T, Verizon, Exxon, Apple and so on) are paying more than 5-10 times yield compared to 10-year treasuries. And coming to FOMO, the sectors which have gone up significantly over last 6 weeks (e.g. Energy, Banks and Transportations/leisure) are still down significantly if you compare their stock prices just 3 months back. So the folks who are daring enough to look at world beyond pandemic are making the bets investing in these sectors because such opportunities come once in a decade!

That sums up why we are seeing the great disconnect between two streets! 

(and I just added "Tale of Two Cities" on my reading list)

/Shyam