Joel’s Weekly Talking Points – 6/15/20

1. Rally on pause: Stocks pulled back the most in three months (see table below) in what appears to have been some short-term profit taking in my opinion.  There is some concern of the pandemic worsening in some specific areas like Arizona, but for now these appear to be isolated and small on a relative basis.  As state lockdowns continue to lift, and reopening’s evolve there will be a chance of a “second wave” but I do not believe there is political will to go through another lockdown.  The one thing that may cause another full quarantine is if our healthcare system were to get overwhelmed, but there is no sign of that today.
2. Sentiment: We saw a significant reversal in sentiment last week with retail and travel related shares rebounding strongly on Monday. Senior White House Advisor Kevin Hassett placed the odds of another fiscal stimulus package at near 100%.  I continue to believe that the overwhelming fiscal and monetary response to this crisis has put a floor under risk assets, and we continue to see sign in the press from folks like Mr. Hassett and the FED promising more relief as the economy reopens.
3. Stimulus and the economy: We have been keeping an eye on a lot of data points, but these three I feel really sum up the effects of the stimulus: A) Credit spreads B) Initial claims and C) Continuing Unemployment claims.  All three have shown improvement in the last 30 days and I believe are big reasons why we have seen such a strong rally recently (last week notwithstanding).  Spreads give us a good view of the risk appetite that bond traders have – and they tend to be a conservative bunch in terms of risk.  Initial claims, while still ugly, have gotten better and may even be showing jobs lost months ago as states continue to catch up from the surge of claims from March and April.  Finally, continuing unemployment claims, while not a perfect data point, declined for the first time since the pandemic started.
4. Officially a recession: The body that officially declares when recessions begin and end, the National Bureau of Economic Research (NBER) stated last week that the recession officially started in February.  This is somewhat unusual for them to declare it as soon as they have – typically they wait to see a sustained decline in GDP.  They will also be charged with declaring it’s end and given that it’s an election year I have to believe that there will be pressure from all sides to end it sooner, or not…
5. JOLTS: Last week I mentioned that this is one of my favorite data points to examine as it gives, in my opinion, a more nuanced look at the job market. Let’s just say the report last week was…disappointing.  The total number of jobs open in the US declined to ~5 million.  Down from 5.8 million in April and 6.5 million in February.  The number of openings was expected to be 5.5 million and is now at its lowest point since 2014.
6. Fun information for the week: GREAT TIME TO BUY – The average interest rate nationwide on a 30-year fixed rate mortgage fell to 3.15%on Thursday 5/28/20, the lowest ever recorded in US history.  That means home buyers would pay just $430 per month in “principal and interest” payments for every $100,000 borrowed (source: Freddie Mac).

Bottom line:  Last week we changed our thesis from being what I would characterize as being “uber” defensive, to just plain old defensive.  Since hindsight it the best money manager in history, of course, we appear to have been early on that call – for now.  I believe that the backdrop of fiscal and monetary stimulus, jobs beginning to come back, and growing consensus that we’ll have at least better treatment options if not a vaccine for the virus there is reason to be optimistic.  Of course markets can get ahead of themselves, and corrections and volatility will be ever-present risks but at least for now, we have to accept the fact that the worst case scenario of a depression appear to have been averted.

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