Joel’s Weekly Talking Points – 5/11/20

1. US Unemployment: On Friday, it was announced the unemployment rate in the US reach ed 14.7%.  This is the highest number the US has seen since it began collecting the data in 1948.  It is estimated that the rate hit approximately 25% during the Great Depression in the 1930’s, however this was based on census data at the time.  The actual rate may have been much higher.  This rate may get worse before it gets better – while this month’s rate came in better than most estimates (I was reading anywhere from 16-20%) there are millions of people who dropped out of the workforce in April.  This lowers the labor force total, which is the denominator in the equation the government uses to calculate the unemployment rate.
2. The 90% Economy: The Economist has just been a treasure trove of information in the past few weeks. The May 2^nd-8^th edition was entitled “The 90% Economy” which discussed how a rebound to 90% of pre-COVID economic activity could actually be devastating if that’s “as good as it gets”.  The scenario they lay out is pretty grim: growing wealth disparity, increasing geopolitical tensions, the continued rise of populism and even extremism in politics – it all sounds pretty 1920-1930ish which lead to the rise of Fascism and Nazism in Europe and elsewhere.  This isn’t a prediction as much as it is a warning – the need to get economies back on their feet as fast as possible is critical.
3. Reopening’s: Most of the states in the US are now under some stage of their reopening process. Some states, and even cities, are farther along than others.  Sadly, the data is already showing a rise in the number of COVID-19 cases in some areas.  What does that mean?  In my opinion, there is very little political appetite to close the economy again – it seems as if some Americans are willing to take on the health risk in order to return to normal.  I do believe that any economic impact from these reopening’s will be limited as most Americans will be very cautious for the next few months – both with going out into crowds and with spending.
4. Data: Key data points we are tracking this week include: CPI, PPI, Retail Sales, and one of my favorites, the JOLTs report.  This data should provide us with information on the inflation/deflation debate, how the US consumer is holding up, and more information on the jobs market respectively.  While some are very concerned about inflation due to the massive global stimulus, I believe that we may be in for a bout of deflation before we see any inflation.  Recessions are notorious for downward pressure of prices, but once we rebound out of this the fact of the matter is there will likely still be “excess” dollars in the system.
5. Fun information for the week: ONE MONTH, ONE DAY – The TSA screened 3,287,008 airlines passengers in the United States during the month of April 2020, a daily average of 109,567.  The TSA screened 2, 499,461 airline passengers in the United States on the single day of Tuesday 4/30/19 (source: Transportation Security Administration).   

Bottom line:  The market just keeps rallying on – looking at the data above, especially with the 5%+ pop in Small Caps last week it’s difficult to remember that we have close to 15% unemployment in the US.  I read a number of potential explanations for the apparent break between horrible economic data and the markets.  Some of the explanations ran through the usual suspects: The Fed, stimulus, expectations of a “V” shape recovery, etc.  Some of these bear more weight than others in my opinion but I am of the belief that the market may have gone too far, too fast here.  As of this writing, the Russell 1000 is only down 8.81% YTD – folks, that index isn’t even pricing in a recession in my opinion.  At the end of the day, we still need more clarity on the virus, when we’ll have a vaccine, when we’ll have more effective treatments, etc.  In addition, we need to see what reopening’s look like – the month of May is shaping up to be a pivotal in the story here.  This may be either be the beginning of end, or the end of the beginning.  To see which one will take some time but make no mistake about it, there is a lot riding on how these limited reopening’s go.

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