As we come to the end of April, we want to take time to look back at the economy, the markets and the opportunities that may be emerging.
“The two most powerful warriors are patience and time.” -Leo Tolstoy
Patience and time are key principles in an increasingly intertwined work/home paradox. The past two months have changed how we look at the economic landscape as well as the world around us. The speed and magnitude of the market moves have been unprecedented. Economies are facing an extreme “demand shock” combined with a category five hurricane-like supply shock, the repercussions of which are only now starting to be known. All being said, the combination of optimism on the health front and an unprecedented fiscal and monetary response have calmed global markets and improved investment psyche. It will take time to work through these issues, and with it, a great deal of patience as we expect continuing volatility.
“Don’t fight the Fed.” -Marty Zweig
At the same time, the monetary, fiscal and health response to the crisis has been equally as fast and significant. The U.S. alone has committed roughly $10 trillion in its efforts to insulate the economy from the COVID-19 pandemic, all the while allowing the Federal Reserve to redefine the role central banks play in fostering economic growth. From lending directly to businesses, states, and cities to extending credit globally, Jerome Powell’s Fed is more powerful (and likely effective) than any of the past. The Fed’s actions ultimately represent a level of cooperation with the Treasury and Congress not seen since World War II. Continuing to do so while remaining apolitical will be a harrowing act.
The Fed is now in a growth-at-any-price mode, and thus far, the S&P’s 30% rally from the March lows has once again demonstrated that investing in line with the Fed is more profitable than against the monetary policy.
“It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.” -Harry S. Truman
In the months ahead, unemployment will provide clues that will help forecast the depths of the recession and trajectory of future economic growth. On this front, we will focus on two key employment figures: unemployment claims and payroll tax withholding.
Initial jobless claims likely peaked at 6.9 million for the week ending March 28. Since then, claims have declined four weeks in a row to a still ominous 3.8 million. Continuing unemployment claims, however, are still rising every week and will likely keep doing so until further restrictions are lifted. We feel the peak in continuing claims will be a key indicator that will allow us to anticipate the bottom of the recession.
Interrelated, we are following the daily release of the government’s receipts for withheld income and payroll taxes. While still declining and down 10% year over year, a trough in this number will further confirm an economic bottom, as this will signal that furloughed employees are back online.
“When you are unemployed, weekends are seven days long.” -Mokokoma Mokhonoana
Roughly 20 percent of the American workforce is currently collecting unemployment benefits. While this number is unimaginable, the recent CARES Act has made accommodations to unemployment benefits to keep most individuals from realizing a large decline in weekly wages. According to the Bureau of Labor Statistics, the median weekly earnings of the nation’s 115.9 million full-time wage and salary workers was $957 in the first quarter of 2020. With the recent addition of $600 per week in unemployment benefits, the range of unemployment checks will be between $813 (in Mississippi) and $1,155 (in Massachusetts). This phenomenon should prove valuable as the economy restarts.
We will be paying careful attention to what consumers are doing with their unemployment benefits and stimulus checks. Early indications are that these checks are going directly into bank accounts as the money in the system has increased by reported 14% over the past four weeks. As the nation’s “stay at home” orders are relaxed, we expect this increase should translate into a measurable surge in the velocity of money (see definition) as consumers and businesses work through repressed demand. The result, while likely inflationary, will ultimately benefit GDP.
Intuitively, the increase in money supply and the subsequent decline in interest rates will be supportive of equity markets as investors are offered more attractive returns in equities than other asset classes.
“Successful investing is about managing risk, not avoiding it.” -Benjamin Graham
Last month, we introduced the three phases we believe the markets will follow throughout the crisis. The first phase, dominated by elevated uncertainty and anxiety, was characterized by high volatility and unusual correlations (indiscriminate selling).
The recent introduction of plans to reopen commerce gradually has provided clues to the second phase of the crisis. We will look to the continued effectiveness of the health, monetary and fiscal responses to provide further cues. We understand that volatility will persist, and timing the exact bottom of markets is not possible, especially given the wide range of possibilities and the inherent unpredictability of the current situation. We remain underweight in global equities and favor U.S. large caps relative to international stocks. Our preference is for countries, markets and companies that were the strongest before the coronavirus crisis with the expectation that they will be best positioned to emerge in a post-virus world.
Numerous solutions created today to deal with the crisis will exacerbate and accelerate longer-term secular trends that will define global growth. These trends will transform the global economy by shifting societal priorities, driving innovation, and redefining business models. Finding the potential for structural change and investing in expected transformations will be a key driver of alpha as we enter a new economic cycle. We are actively pursuing opportunities to capitalize on long-term trends in areas such as technology, healthcare and ESG.
We look forward to working with you to navigate the markets as we seek to ensure that our portfolios reflect appropriate risk to meet long term goals. Given this framework, we continue to approach equities with patience as we look for prospects to upgrade individual holdings while being forward thinking, thematically adding to securities and asset classes as appropriate. Risk management techniques — such as asset class diversification, rebalancing, and being mindful of sector exposures and concentrations — remain critical as we navigate the current market landscape.
In this especially challenging time, we thank you for your confidence and trust in us. We encourage you to contact your relationship team with any investment questions, concerns, or perspectives as 2020 continues to unfold.
Mr. Heckscher is Senior Vice President, Director of Fixed Income, and Chief Investment Officer of Pennsylvania Trust.
Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.