What better time for a check-in than late August? As we coast towards Labor Day, many of our lives shift gears to some extent. While we are between cogs, below are some market thoughts and reassurances to go with your late summer ice-filled glasses of lemonade.
Reality, when viewed through the lens of the market, is a fuzzy-edged thing these days. Getting to the bottom of what matters is half the battle. The other half involves conviction, confidence, an open mind, and willingness to change course.
As I write this piece, the S&P 500 is making new all-time highs, with the tech sector leading the charge – although digging a few layers deeper, the average S&P 500 stock and most small and mid-sized stocks are still down for the year. Read on to see why this is dynamic may continue and why we are using alternative data to help guide us in these usual times…
As the COVID health crisis started to accelerate, BSW noticed that many of the traditional economic indicators that we use to gauge market outcomes were becoming less reliable; The fast-moving health situation, combined with the method of compiling economic indicators, left them vulnerable to being outdated and imprecise.
Take the University of Michigan Consumer Confidence Index – usually a gauge of how frisky the consumer is feeling. This number is the mathematical output of 50 qualitative questions asked of 500 households in a telephone survey. During recent COVID lockdowns, who is going to answer their phone and take a 50-question survey? Probably those folks who either have been laid off, (and who are now making more than they were at their previous day jobs); or those who are fortunate enough to have jobs and are working from home. The vast majority of those that would answer all 50 questions with a big fat raspberry likely cannot afford a phone right now.
Along with questionable consumer confidence data, we are getting mixed signals from unemployment data. The most recent government unemployment figures show that there are more people collecting unemployment than are unemployed. This simply cannot be (it is illegal to collect unemployment while employed) and reflects the difficulty in surveying this fast-moving situation, as well as shortcomings in how the data is collected.
In recent posts, I have highlighted how useless interest rates are as market signaling mechanisms – with the Fed essentially controlling bond yields. In my opinion, this is troubling if kept up for too long because financial markets incorporate interest rates as the foundation on which to price risk, to price assets relative to each other and to ascertain the current value of future earnings and cash flows.
Given the above, what can we lean on as economic tell-tales in these troubling times? BSW has been poring over alternative, high-frequency (daily) data to determine which way the wind is blowing. This data includes the U.S. and global COVID infection counts, U.S. and global mobility data (gleaned from cell phones), OpenTable restaurant reservations and public transportation data – among others. These are the types of live, on-the-ground indicators that attempt to show how people are actually behaving.
The driver of the economy right now does not seem to be interest rates, earnings, or any other traditional economic indicator. In our opinion, the economy is currently dependent upon COVID infection rates, and by extension, how states are responding to surges and/or declines in infection rates.
When COVID cases declined in the spring, all these alternative indicators pointed towards increased mobility and activity. However, as soon as the U.S. saw COVID spikes in the South that drove up national infection rates, all these indicators plateaued and have gone nowhere since. Again, the link between mobility, COVID cases and the economy cannot be undersold.
Without freedom of movement, either abroad or here in the U.S, our global economy may continue to struggle. Our supply chains and work ecosystems rely on the frictionless movement of the workforce – although this may be changing too, and hopefully for the better! Although remember, the economy does not always correlate directly with the market. More to come on that…
Closely related to the infection rate is society’s behavior patterns when it comes to shutdowns and reopening. For example, we can see that in China, reported infections (if you can believe their data) are close to nil in Beijing and Shanghai. People should have no reason not to jump back on public transit and go back to work in giant office skyscrapers. However, the data clearly shows that metro passenger volume is still 30-40% below its pre-COVID levels. Many Chinese citizens are choosing not to get on public transport, even with the government prodding them to do so.
Even given all the above, BSW is seeing nascent evidence that this recession may result in the reset and refresh of the global business cycle. Typically, after a recession, there is pent up demand and favorable monetary stimulus in place that results in a new growth period that takes the economy through prior peaks.
We certainly have the stimulus part in place (thank you Chair Powell); we just need the demand side of the equation to step up. On the latter front, we are seeing evidence that this crisis may be further bifurcating the stock market into winners and losers. Some of these winners have been software companies. We believe the decade’s long trend to use software solutions to boost efficiencies in the workplace has massively accelerated in 2020, due mostly to work from home mandates.
Most of the companies that have been thriving during COVID are the ones that were already geared toward technological advances, online consumer experiences and healthcare solutions. Lucky for investors, these were the stocks that were already dominant in stock indices pre-COVID. That is why we see the market making new highs. Firms that are positioned for a cleaner, more efficient and healthier future have put the stock market on their backs and carried the day. It is certainly possible that this trend can continue, especially with added stimulus measures.
BSW has remained vigilant and energized when faced with the recent uncertainty. Although we work away from each other (for now), we have never been more united. We recognize that the velocity with which things are changing through this health crisis means that we need to pivot to different data sources and be willing to move quickly in response.
Until Next Time, Be Well.
Craig Seidler, Director of Public Investments