We were reflecting upon our view, pre-covid; Our 2020 vision is focused on macro themes which drill down into investments that will provide long-term benefits to our clients. Each year there is a lot of noise that could potentially distract people from the core long term trends.
Well, we have had more than our fair share of noise that certainly is distracting. We pivoted from the written prose to “Facebook Live” daily in March, and we continue to host weekly commentary on Wednesdays at 4:30PM – Bell Rock Capital Group On Facebook. Please join us!
Monetary Policy Remains Poised to Act. The Fed aggressively lowered rates, as the health crises became acute, to near zero earlier this year from 1.50%-1.75% and here it remains. We do not expect the Fed to adopt a negative rate policy, although the US could experience flights to negativity from time to time. What else has the Fed executed? In a nutshell, they have executed much of the heavy lifting. For a while, the Fed and other Central banks around the globe were the only stimuli. Their respective strong and swift actions provided confidence and liquidity to the global bond and equity markets. As of June 2020, most G20 countries committed to fiscal stimulus with some at 3% of GDP and others at more than 21% of their GDP. The US stood at 13%, according to statistica.com. Maintaining liquidity during stress is a key component to keeping an orderly market environment so this remains an underlying positive. The other key point is that the Federal Reserve and other Central banks stand poised to act if and or when additional action may be needed.
Strong Commitment to Fiscal Stimulus. On the fiscal stimulus side of the equation, year-to-date the U.S. has provided $2T and the next relief package is projected to be approximately $1T. Across the world, the collective fiscal stimulus is estimated to be at about $9T with $4.4T to public sector loans and equity positions, with guarantees and other activities adding up to another $4.6T, according to National authorities and the IMF. The Cares Act, a $2T stimulus package was signed into law in March to provide support to people, families, and businesses negatively impacted by covid-19. This Act included approximately $560B to individuals, $380B to small businesses, $340B to state and local governments, $500B to large businesses, $150B to public health and $44B to education and others, according to NPR. Specifically, this Act included the $1,200 stimulus checks, the extra $600 per week to unemployment benefits, the Paycheck Protection Program, and the Economic Injury Disaster Loan Program. Across the pond, governments reached an agreement of nearly $1T Euro including both grants and loans to be distributed among countries and sectors most impacted by covid-19. Further, there is a proposed plan to end new debt issuance by 2026 and repay all new debt by 2058. Also, these governments want to be climate neutral by 2050 and are committing 30% of their budgets to climate concerns.
The yield curve is extremely flat with the ten-year US Treasury bond yield stands at 0.54% and the two-year at 0.12%, versus 2.06% and 1.84% a year ago. For comparison purposes, the S&P 500 yield stands at approximately 2.3%. This year many companies cut their dividends and suspended share buybacks to fortify their balance sheets and preserve capital. These ultra-low rates are driving home refinancing activity to very robust levels and this is especially helpful for many people seeking new homes based upon their covid experiences. Further propelling this trend is the work-from-home model. For many years, this had been a relatively small component of many businesses, but it took a dramatic turn in adoption and acceptance during the covid restrictions. So many employers and employees have a new sense of work from anywhere and are re-imagining the ideal lifestyle of working and living (and some teaching) at home.
Corporate earnings better than expected. Quarterly earnings are still coming in and they are largely better than the muted projections. More importantly, companies continue to shore-up their balance sheets with successful debt and equity raises. Selective merger and acquisition activity are occurring across many sectors. Some are distressed sales, while others are indicative of solid growth strategies.
Therapies and Vaccines Rapid Development. Several major companies are entering phase 3 human trials on vaccines, which is a positive from a long-term perspective. It is important to note that the rapid development of various therapies and vaccines has created even more market volatility at times. The full throttle effort by universities, governments and companies across the globe has fueled nearly real-time reporting on small data sets that has whip-sawed the markets. There has been so much progress year-to-date and it is essential to note that there is likely to be some very important unintended discoveries from the research taking place due to covid. We believe the years following could be quite robust for research and development companies and potential new specialty drugs coming into the marketplace.
Operation WARP speed is a public-private partnership started by the US government to facilitate covid research, trials, treatments, vaccines, manufacturing, and distribution. We were able to locate a budget of $10B, at least to this Operation. There are approximately eight companies selected for funding thus far. Moderna and Astra Zenaca have received sizable grants. The goal of operation Warp Speed is to develop, manufacture and distribute hundreds of millions of covid vaccine does by YE 2020.
Supply chain control has forever changed. The U.S. and many other countries are bringing back various essential supply chain items to their soil. What we learned and are learning from covid, will not be forgotten too soon. We need certain essentials and a supply of various items, just in case. The just-in time inventory is fine for discretionary items, but for non-discretionary items; it is now, just in case! We expect manufacturing to come on shore for the U.S. and other countries with duplicative production distributed throughout the globe. Presently, pharmaceutical ingredients are essential and there will be other components that will be within the purview of, in our nation’s best interest.
During covid, automobile factories converted to making ventilators while distillers and brewers converted to producing hand sanitizer and healthcare providers waived patient costs for cov-19 treatments. The Development Finance Corporation (DFC’s) first investment using the President’s executive order supporting domestic response to Covid-19 under the Defense Production Act was to award $765 million government loan to produce drug ingredients to Kodak pharmaceuticals. There was a ton of volatility around company but, a key point is it’s the first move to bring the production of generic drug ingredients onto U.S. soil. Did you know that approximately 90% of drugs are generics and made overseas? There is more to come.
5G begins to take hold. The 5G large trend is progressing. Many companies talk about what they are doing in 5G and specific geographies throughout the US are being wired for 5G, but it is still in its infancy stage. It will take several years for 5G to be rolled out with enough magnitude to make its mark in multiple sectors of the global economy, and it will be worth the wait.
Volatility is here to stay. The long-term average VIX (volatility index) value is 22 (the higher the number the more volatility) and most often the value is 12. In 2020, the trading range has been 85 – 12. Since April 2009, the VIX had not traded at 50 or above, until covid which drove the VIX to trade near 85 in March. We expect more volatility as we move through the presidential cycle, trade tiffs, covid therapies/vaccine results and global unrest.
We entered 2020 with confidence and a strong educated prediction that by the end of this year the markets would be moderately higher, up 6%-8%. The underlying corporate and consumer positives continued to outweigh the negatives. Currently, the general market forecast remains intact although the path has been different. As you know we regularly post market commentary and it is important to remember that these are short-term views as we customize respective asset allocations to the individual’s time horizon and risk characteristics. We thank you for your continued faith and trust in us. Stay safe. Stay healthy.