Where Have All the Good Times Gone?
Many were anxious to rediscover the good times, flocking to the streets and beaches as several states began lifting the stay-at-home orders. Here, in the Commonwealth of Pennsylvania, some abided by shelter-in-place requirements, while others protested the continued lockdown. We are now in week eight of the shutdown. Twenty-four counties, all rural, move into the “Yellow phase” beginning on May 8. Most of the state is likely to move into the Yellow (caution phase) over the coming weeks. During this period, with limited exception, we will behave just as we have behaved over the past weeks. We will social distance, we will wear masks, we will work from home, and we will feel a bit better knowing that a return to what will be a new normal is now imaginable before the end of summer. Under code Yellow, stay-at-home orders will be lifted. Childcare centers and some retail shops can reopen, and gatherings of up to 25 are allowed. Telework should continue at businesses where it is possible. Restaurants and bars will still be limited to takeout and delivery. School buildings will remain closed, along with gyms, salons, and theaters. Visits to nursing homes will still be prohibited. Oh, how we long for the return of the good times!
With the nation and much of the world under lockdown, the U.S. equity markets logged the worst March since the Great Depression followed by the best April in 33 years. On Thursday and Friday of last week, the DOW gave back 910 points (3.4%). We expect this volatility to continue.
To assist readers in better understanding market volatility we offer Carnival Corporation (owned by Carnival, PLC., the largest Cruise operator in the world with nearly 40% of the market) as an example. Note: PWA is not an investor in, nor a fan of, the cruise line industry.
On March 2, 2020 Carnival (CCL) traded at $33.06 per share. On Friday, May 1, the stock closed at $13.93, down 58%. During that time period, the stock traded below $8 twice and rallied to $17 before retreating to the current level. Volatility: $33 to $8 to $17 to $8 to $13.93 (per share). Where next? Many suspect that the cruise industry will be impaired for years as travelers choose to avoid the scenario that unfolded during this pandemic. But those buying the stock think differently, i.e. investors who believe that the cruise industry will once again return to profitability and that cabin-fever will give way to travelers returning to what they love to do – cruise! Hence, we see the making of a volatile market: Those wishing to take advantage of what they see as a short-term opportunity to buy into the industry that they believe will recover vs. those believing the industry will be impaired for years. As a side note, according to the U.S. Coast Guard, at the time of this writing, there are 122 cruise ships in U.S. waters with more than 80,000 crew members on board. While the passengers have disembarked, many crew members remain stranded. They, too, are asking, “Where have all the good times gone?”
We now stand at an interesting crossroads. The panic selling has passed. The short sellers have covered. The reality of earnings season will tell us what we already know: The decisions to shut down have had historic negative effects on many companies. The pandemic and accompanying government responses create outcomes for businesses, for families, for charities, for all of us. The outcomes are better for some and worse for others. The decisions made now will significantly change the path of recovery. The problem lies in the fact that no one really knows what to expect next. When will our economy return to full operation? When will we be able to look forward with confidence in our decisions?
This past weekend Warren Buffett, legendary investor, Chairman and CEO of Berkshire Hathaway, faced his shareholders via a remote shareholder meeting. Traditionally, in times of extreme market stress, Mr. Buffett’s company deploys its vast cash hoard, $137 billion on March 31, taking advantage of companies on sale. This time is different. Mr. Buffett has not bought anything during the pandemic volatility. When asked why, he responded, “We haven’t seen anything attractive.”
Mr. Buffett has always understood that the stock market is a market that places a value on a company every second of the trading day. The value may be too high or too low based on an investor’s time horizon and belief about the company’s future. Mr. Buffett has a very substantial investment time horizon and only buys companies he and his team believe represent great value long term. At PWA, we echo that sentiment. Stock investments are intended to be long term and play a role of wealth creation and replacement. Our job is to take care of every client and their money. Our goal is to have every client achieve their goal.
Like Mr. Buffett, we believe that nothing can really stop America. Our system of government, although imperfect, allows capitalism to flourish. Our system allows entrepreneurs to take risk and either succeed or fail. Although the failures are far greater than the successes, our system rewards those who successfully take risk. Successful risk taking does more than create wealth. The creation of companies, large and small, provides worker paychecks and tax revenue. Payroll taxes, Unemployment taxes, Social Security and Medicare taxes, Business Privilege taxes, real estate taxes…this list is incomplete but begins to identify the fact that all government programs are paid for with taxpayer money — your money. The federal government’s response to the pandemic, currently exceeding $7 trillion, will be paid for with taxpayer money. The cost of recovery will be great, but our economy will recover. Our system of government will remain intact and we will do what we have always done — whatever we need to do to succeed.
Before closing, we would be remiss to not give a “shout-out” to Gilead Sciences. In our April 27 Market Update, we characterized the company as Wall Street’s “darling one week, a disappointment the next.” On Friday, May 1, with FDA approval to fast track remdesivir, its Covid-19 medicine, Gilead announced that it would donate its entire current supply at no cost to treat patients. Investors did not reward this good deed; in fact, its share price took a hit, dropping 4.82%. The company is a hero in our eyes.
Be it in the development of testing, medicines, or vaccines, collaboration and innovation will win the day, and this coronavirus beast will be tamed. America cannot be stopped. In the meantime, economic data, however grim, will fuel the way from parsing uncertainty into quantifiable risk.
Where have all the good times gone? As always, the good times that will appear are right before our eyes.
On behalf of my PWA colleagues, we wish all mothers a happy and healthy Mother’s Day!
Thank you for your continued confidence.
Joseph A. Scarpo
Founder & CEO