Q1 Market Update and Commentary

April 9, 2021

One year after COVID-19 in America – a financial perspective

Read the most recent commentary here: Q32021

People who know me know that I am a baseball fanatic. It should be no surprise then that spring is one of my favorite times of the year. The crack of the bat and hope for the upcoming season are as uplifting to those of us infected with this brand of crazy as the longer and warmer days are to most.

In baseball, a home run is often referred to as a “round tripper” – obviously from the fact that the player starts at home, touches all the bases, and ends at home. This past March marked the anniversary of the market depths of the pandemic. Have the financial markets pulled off their own round tripper, or are they still rounding second on their way to third – waiting to get back to where they started?

In my opinion, a lot has changed since the economy came to a screeching halt in March 2020. On so many levels it has been a historic period. Along those lines, the emergency fiscal policies put in place have never been attempted, so it is important to realize that we have been, and likely will be, in uncharted territory for some time to come.

Let us start from those fateful days in Q1 2020 when the world as we knew it was turned upside down. This update will stick to the financial side, but volumes could also be written about the societal changes that may also be long lasting.

At the depths of 2020, the S&P 500 traded at 2,305; down 32% from its previous high of 3,380 less than a month earlier. At that time, no stimulus had been announced, COVID counts were rising, and fear and uncertainty were peaking. The following statistics highlight just how bad things had become as the pandemic essentially shut down the U.S. economy during early 2020:

  • The unemployment rate peaked at 14.8% (a level not seen since data on this series started in 1948). In-person services industries suffered the most as leisure and hospitality experienced 39.3% unemployment.
  • Retail sales dropped a record 14.7% in April 2020.
  • The benchmark 10-year U.S. treasury yield hit an all-time low of 0.32% in March 2020, as investors fled to safe assets.
  • The price of oil went negative as sellers paid buyers to take inventory off their hands due to lack of storage and weak demand prospects.
  • The Empire State Manufacturing Survey plunged to -78.2 in April 2020. By comparison, it fell to -34.3 during the Great Recession of 2007-2009.

Dire indeed. And it wasn’t as if there were other parts of the global economy that could help lift the U.S. out of the condition. This was a world-wide situation that threatened to turn into a broad economic depression.

Enter the CARES Act on March 27, 2020. The $2.2 trillion emergency relief program attempted to put a floor under the damage the pandemic could do to the economy by plugging the holes created by business shutdowns and the ensuing economic downward spiral. The Federal Reserve also worked to keep the plumbing of the banking system working and kept rates at historic lows to promote lending.

The CARES Act, along with businesses reopening and encouraging news on vaccines, set the stage for a 180-degree flip in sentiment and future expectations for the economy. The market (as measured by the S&P 500) never looked back to those depths of March 2020. It proceeded to rally 63% over the remainder of the year, eclipsing the previous high achieved in February of 2020.

Knowing that the market is forward looking, what does the underlying economy look like today?

U.S. corporate profits, as measured by S&P 500 operating earnings per share, fell 22% in 2020. They are expected to rise 40% year over year in 2021 and analysts (a traditionally optimistic bunch) are expecting 60% profit growth in 2022! This means that if corporations meet expectations this year, they will finish this year ~9% ahead of where they were pre-pandemic. It’s a little too early to count on such heady numbers for 2022, but regardless, the economy is now showing real signs of life.

The following statistics are a temperature check of where the economy is now:

  • The current unemployment rate has dipped from 14.8% to 6.0% but is still 2.5 percentage points above its pre-pandemic levels. Importantly, the economy has now recovered 14 million, or 62%, of the mind boggling 22.4 million jobs lost in the pandemic.
  • Retail sales for February 2021 were down 3%, but that was on the heels of a very strong January report of +7.6%.
  • The benchmark 10-year U.S. treasury is trading at 1.65% – a healthier level that reflects a growing economy.
  • Oil is trading at ~$60/barrel as flights increase and demand for oil in general returns.
  • The ISM Manufacturing index came in at a 37-year record high for March.

All signs point to continued strength for the U.S. economy. Along with further stimulus, President Biden has proposed a $2 trillion infrastructure bill that may provide more boost to the economy – if not this year, then in years to come.

Of course, we need to temper our enthusiasm as vaccines roll out and the nation gets ready to enjoy the summer. On our radar of potential risks (yes, they are ALWAYS out there) are the following: another surge of the pandemic and possible mutant strains, higher corporate taxes to pay for the infrastructure bill, inflation caused by pent up demand, and the resultant high interest rates. Any or all the above could throw a wet blanket on the economy’s emergence from the pandemic funk.

The economy, as measured by the stock market, has already hit a home run. Stocks are making new highs based upon the notion that growth will continue. The economy on the other hand has not quite completed its round tripper. A curtain call at this point would be premature.

BSW is continuing to monitor the data and is optimistic that the economy is on its way to standing on its own two feet. We also hold out hope that society has learned from our collective pandemic experience; and that the cracks and vulnerabilities exposed during the past year are reevaluated with a fresh perspective going forward.

So, here’s to spring, hope, baseball and longer days filled with the things we missed most last year.

Thanks for reading and stay safe.

Craig Seidler, Director of Public Investments