For several weeks, our Market Updates have noted a disconnect between Wall Street and Main Street. The stock market has rallied, led by a small number of large-cap technology companies, while simultaneously 32 million Americans are now out of work and the economy experienced record declines in retail spending. Consumer spending accounts for 70% of our nation’s Gross Domestic Product (GDP), a principal force in our shrinking economy. So, what has been driving the stock market?
The Role of the Federal Reserve
From the pandemic’s onset, Chairman Jerome Powell declared the Fed would act “forcefully, proactively, and aggressively until the economy is on track for recovery.” Until is the key word: Since the days of the Great Recession in 2008-09, the Fed has been comfortable flooding the economy with cash. This happens through economic stimulus; this time, by lowering interest rates to zero, buying Treasury notes and mortgage-backed securities, and creating brand-new credit facilities—lending $2.3 trillion to businesses, cities, and states. In a nutshell, investors trust the Fed’s “do what it takes” mentality and act accordingly. The flood of cash looks for a home and often finds its way to financial assets. Over the past few months, the Fed directly entered the fixed income markets, buying a variety of bonds and placing a floor under bond prices.
Two Voices, One Message
A dose of reality hit hard on May 13th, when Mr. Powell proclaimed the economic path ahead is “highly uncertain.” He spoke empathically about “this reversal of economic fortune…” adding that “long stretches of unemployment can damage or end workers’ careers…the loss of small and medium sized businesses across the country would destroy the life’s work and legacy of many businesses…and limit the strength of recovery when it comes.” Mr. Powell brought home the pain and devastation of Main Street to Wall Street, urging Congress to take additional fiscal measures like the CARES Act to lessen the blow. (We, too, expect Congress to ratify additional interventions.)
Noting that economic forecasts are inexact in the best of times, Mr. Powell closed his address by acknowledging that today’s uncertainty is intensified by the coronavirus: Can new outbreaks be avoided? What will be the timing and scope of new medicines, tests, and vaccines? How long will it take for confidence to return to the American public? These questions echoed the previous day’s sentiments when Dr. Anthony Fauci, while quarantined at his home, testified remotely at a Senate hearing. Dr. Fauci asserted that Americans would experience “suffering and death that could be avoided” if the nation’s reopening happened too soon. In response to repeated questions about when better therapeutics and a vaccine would be available, Dr. Fauci dismissed the notion they might be in use by the time schools reopen in the fall.
Two separate messages from two separate experts—one economic, one medical—with one singular impact: More confusion between Wall Street and Main Street. Last week, the market traded down to the same level it was trading on March 11th and on April 7th. We expect continued volatility as new forces take shape, including “Operation Warp Speed” an attempt at rapid vaccine development, along with heightened pressure on China from the White House.
Earlier we commented that the rally has been led by a small number of very large technology companies. Five companies, Microsoft, Apple, Amazon, Google, and Facebook, account for more than 20% of the value of the entire S&P 500. In 2020, despite the lockdown, those companies benefited from the stay-at-home and work-from-home environment. In contrast, many companies and industry sectors were significantly negatively impacted. Examples of negatively impacted sectors include:
Real Estate -20.21%
Also, of note, the airlines are down 65.94%.
(Year-to-date performance results as of Friday, May 15th)
The results reported above are but a small sample that makes the point that coming out of this pandemic, there will be many investment opportunities. The criteria may become more stringent—more selective—but there will be companies whose value propositions are rock-solid. PWA Wealth Management is diligent in studying and evaluating these opportunities on your behalf.
We at PWA acknowledge that public health and economic health go hand in hand. Managing the reopening of our economy is a monumental challenge shared by all of us, and we wish our clients the very best as we roll into the summer. PWA will continue to exercise full compliance with the Governor’s orders. We will continue to work remotely. All client meetings will occur via remote access or by phone until the risk of spreading the disease has passed or can be very effectively managed. We are here for you and look forward to the return to normalcy—albeit, a new normal!
We congratulate all graduates—High school and College—as they prepare for the next steps in their lives. We thank all front-line workers who have endured personal harm for the good of others. We feel sadness for all families that experienced the loss of loved ones. We empathize with those who cancelled or postponed parties, showers, and weddings.
We thank you for your continued confidence.
Joseph A. Scarpo
Founder & CEO