There were a few key updates over the last few weeks, indicating an eye towards the post-Coronavirus future. Given the many developments that we have had during these times, this Update is longer than usual, so please take some time to read the following carefully as there is plenty of pertinent information here.
Coronavirus Fiasco
On any objective scale, the United States has handled the Coronavirus pandemic abysmally. For just a very basic illustration, according to the most recent estimates, the United States has had 554 Coronavirus-related deaths per million people and has yet to peak.1 In countries that have already peaked and largely handled the pandemic, the numbers are drastically different. Germany sits at 112 per million (nearly 5 times lower) and Japan is at 10 per million (nearly 60 times lower).2
Chart: Coronavirus-related deaths compared to U.S. casualties of war
In addition, there is no real assurance that we will flatten the curve anytime soon, as amazingly, several states are mandating in-person schooling. We mention this, not to put forth a political statement, but rather to illustrate the unfortunate likelihood that the pandemic is not going away anytime soon, and future shocks to the economy are likely to occur. Even with a viable vaccine, health experts estimate another 9 to 12 months at a minimum before the population achieves herd immunity.3 Some estimates take us all the way out to 2022.4
In the meantime, it is difficult to see how 30 million unemployed are going to find long-term gainful employment unless we have continual fiscal stimulus throughout this time.5 How the stock market continues to make new highs during this pandemic, shows the absurdly distorted reality we are living in and highlights the incredible disconnect between the stock market and the overall economy. Several valuations are trading at almost ridiculous levels as a small basket of mega-cap tech stocks comprise the largest percentage of the S&P 500 in 40 years.6
The only reason that we haven’t seen a total collapse in asset prices is because the Federal Reserve stepped in as a lender AND AN OWNER of last resort. For the first time in its history, the Fed instituted a blank-check policy and bought corporate debt securities, including non-investment grade securities – a truly unprecedented move.7 This along with the fiscal stimulus, particularly the direct stimulus check and extended unemployment insurance benefits, has propped up, what should be a disastrous economic situation. At the moment, recent economic data bear out the resiliency of the US economy compared to other affected countries…for now. The greater question continues to be, that provided that the pandemic is still here for the foreseeable future, how long can monetary and fiscal policy artificially prop up the economy and subsequently the financial markets, and what happens if and when they can no longer do so. Unfortunately, given the enormous inherent uncertainty here, there is no good answer.
As in all things with the market, ultimately, fundamentals matter. The price of an asset must be related to its net profits and free cash flow. And when you hear that fundamentals and cash-flow doesn’t matter any more, as you are beginning to hear more and more in the media these days, you should be deeply suspicious. There is a herd mentality on Wall Street despite centuries of historical record, and it is easy to get sucked into the frenzy. One is reminded of the run-up to the Dot-Com crash in 2000 – the word “bubble” comes to mind here. And although we may see prices go higher in the short-term, particularly because we are in an election year, there must be an eventual reckoning with reality, and that is when we may be presented with further buying opportunities. In the meantime, although there may be some opportunities here and there, we must sit on the sidelines and take a wait-and-see approach.
The second stimulus package is stuck in Congress, and we cannot stress how important it is that this passes soon. Should this fail to pass, 30 million Americans will not only be jobless, but homeless as well, and this will have a catastrophic effect for our economy and our country. The likelihood is that the bill will pass eventually, probably in September somewhere in the range of a $2 trillion package, and the Congressional negotiations are only a customary part of the process.
All of this said, even this incredible turmoil, shall pass. Nothing long-term – bad or good – endures forever. We will eventually get through this pandemic and return to a semblance of normalcy at some point, but we could definitely see a very bumpy ride in the short-term. As ConCappers, we must take the optimist’s approach and see it as a matter of time.
The 2020 Election
It’s safe to say that we are living in a time in which the country has scarcely been more divided. The Coronavirus Pandemic, the George Floyd protests, the rioting and social unrest in Seattle and Portland where Federal troops were brought in, only further fuels an environment of uncertainty and, as we well know, uncertainty can cause tremendous volatility in the stock market.
At the present time, many polls have the Joe Biden-Kamala Harris ticket winning in November, but we feel this to be very premature. The polls are still close, especially in the battleground states, and given all the turmoil going on in our nation, there is still plenty of time to go until November 3rd.8 The good news is that Joe Biden is not really a leftist or progressive candidate should he get elected, even if his opponent tries to paint him as such, but rather more of a centrist and possibly even center-right on many issues. Wall Street, in many ways, seems to be just fine with a Biden-Harris administration.
One thing that seems a virtual certainty is that the Trump tax cuts will be one of the first things repealed in a new administration, the vast majority of which were instituted as corporate tax cuts to businesses rather than to individuals. The only thing to impact some of you directly that we are aware of is the proposed change in the long-term capital gains tax rates at the top tier, which effectively would change from 20% to the corresponding ordinary income tax bracket.9 We foresee few other changes to tax policy otherwise, but we will keep you updated as we see developments ensue.
As always, we will keep you all posted as we have further developments. This experience has no doubt been painful for many of you, and although there are still some very uncertain times ahead, the turmoil cannot last forever, and we will get to the other side. In the meantime, please stay safe and let’s hope that we can get out of this sooner rather than later and see a much-needed return to normalcy.
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Sources:
1 https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/cases-in-us.html
2 https://www.worldometers.info/coronavirus/#countries
3 https://fortune.com/2020/08/11/covid-vaccine-when-timeline-progress-access-rollout/
4 https://www.jhsph.edu/covid-19/articles/achieving-herd-immunity-with-covid19.html
5 https://www.bls.gov/news.release/empsit.nr0.htm
6 https://markets.businessinsider.com/news/stocks/stock-market-giants-record-sp500-weighting-decades-tech-returns-surge-2020-8-1029488390#
7 https://www.federalreserve.gov/newsevents/pressreleases/monetary20200615a.htm
8 https://projects.fivethirtyeight.com/polls/president-general/national/
9 https://www.cnbc.com/2020/07/21/heres-what-a-biden-presidency-might-mean-for-your-taxes.html
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The opinions expressed in this commentary are those of the author. Comments concerning the past performance of [e.g. monetary instruments, investment indexes or international markets] are not intended to be forward looking and should not be viewed as an indication of future results.
