Joel’s Weekly Talking Points – 7/20/20

Earnings releases of note this week: Coca-Cola, IBM, Synchrony Financial, Capital One, United Airlines, American Airlines, Microsoft, Tesla, Union Pacific, W.W. Grainger, American Express (not a recommendation to buy/sell/hold any of these securities)

1. Market recap:  Markets generally rallied last week, with Value beating Growth for the first time in awhile (3.42% versus -0.83% – see chart below for details).  I’ll share a quote I heard on a conference call recently, “Value may beat Growth for a week or two here and there, but long-term, we still like Growth better.”  Despite some lofty valuations, I would agree – stressing for the long-term.  We may very well see a correction in Growth stocks here in the coming months but it’s difficult to argue against an asset class that has the metrics Growth does: free cash flow, revenue growth, low debt, etc.  Yes, these are generalizations but when you look at a lot of the companies in that category, they certainly fit that description.
2. Banks: Back in 2008 everyone was concerned that the banks were going to plunge us into a new Great Depression.  To prevent that from being a threat again, the Federal Reserve and Congress passed a slew of new regulations to make sure the banks remained properly capitalized.  It took 12 years, but it now looks like that was a very, very good idea.  As banks reported earnings last week, it looks like the ones with diversified revenue streams held up well – these tend to be the bigger, more capitalized ones.  Smaller, Regional Banks that depend on lending appear to be having a harder go of it given the ultra-low interest rate environment.
3. Europe’s time to shine? Last week I wrote about valuations, and that they are starting to look a little (OK, maybe a lot) rich here in the US.  Europe?  Not so much.  Now, we have been hearing that for years…and years…and years.  But – while the valuation story is true in regards to Europe, there is another, possibly more compelling reason to own these stocks right now – they are much further ahead in getting COVID-19 under control.  All you need to do is take a look at the 7-day rolling average of confirmed COVID-19 cases below:
4. Fin Fact of the Week:  Weekly index performance: HEAD SOUTH – The government divides the USA into 4 geographical areas: Northeast, South, Midwest and West.  As of May 2020, the Northeast states had 972,000 job openings while the states in the South region had 2.070 million job openings.  The total number of US job openings: 5.397 million (source: Department of Labor).

Bottom line: Last week I wrote that we “have to start looking at the possibility that the COVID-19 virus will adversely affect the US economy for a lot longer than we initially thought.”  Since then, markets for the most part, have completely shrugged off the increasing, and scary, rise in cases throughout the US.  As long as the Trump Administration is in charge, I do not believe there will be another National lockdown – and that makes sense.  Just because there is a spike in Florida, why should Montana have to shut down?  That being said, until there is a true National policy in place, and in my opinion there isn’t one, we will continue to see flares/spikes/increased case loads all over the country.  Using my own rationale, right now there is nothing stopping a Floridian from travelling to Montana and spreading the virus.  We need better tracing, more testing, and frankly a more responsible citizenry to get through this.

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