Jay Powell and the Fed are in front of the curve providing all the money that the U.S. economy will need to stay afloat. The Fed announced Thursday an additional $2.3 trillion lending program for states, companies of all sizes and individuals. Basically, the Fed is back-stopping everyone, even banks and junk bonds, providing the financial bridge to the other side. Spreads continued to narrow last week which confirms that Fed policy is working. As Powell said, “we will act until the economy is on the road to recovery.” We believe him!
It now appears that the coronavirus in the U.S. will soon peak, deaths could be around 60,000 (well below even the low end of the initial estimate), and the economy will slowly reopen sometime in May region by region. But life will not get anywhere close to normal until there is an antibody test and vaccine which probably will not be on the market until mid 2021. While we expect a therapeutic within months, the freedom to move about will be limited to a degree until there is a vaccine.
Stock markets had a great week led by the laggards, but be careful. While the Fed is keeping all company’s solvent, permitting investors to move further out on the risk curve, it does NOT mean that these companies will recover sufficiently once the virus passes to justify their current valuations. In fact, we expect many won’t make it. Remember the money that companies receive now is a lifeline to just keep them afloat until a recovery occurs. But what happens afterwards? We would continue to avoid any company taking government money until we fully understand the terms, the impact on their P and L, cash flow and balance sheet.
Clearly, we need to analyze what their business will look like on the other side first and foremost. Won’t you think twice before travelling on a plane, going to a crowded restaurant, shopping in the mall, staying in a hotel, going to a movie, sports event, Disneyland, show or concert, taking a cruise, going to school, going to an office, holding face to face meetings, going to a doctor’s office and so on?
The bottom line is that we will not be close to an ‘all clear’ until there is testing, therapeutics and vaccines for all, which won’t happen until sometime next year. Yes, we may start slowly going out in May, but life will not be the same for a long time. That is why we expect the recovery to be drawn out into a U, not a V as the administration wants you to believe. Our overriding theme remains that there will be a huge change in mindsets caused by the coronavirus. The new normal will be spending more time at home using the internet increasingly for social media, shopping, business, education, healthcare, legal and accounting services, videoconferencing; entertainment, gambling, sports, and many other functions which were heretofore done out of the home. The winners are obvious, making up the core of our portfolio. Data centers/semis, cloud usage, smart devices and 5G are long term beneficiaries, too.
Bob Swan, COO of Intel, and Michael Dell, COO of Dell, both confirmed last week that demand for smart devices, especially laptops and tablets, is exceptionally strong. Bill Gates and many others want the government to provide billions to buy smart devices for all families/children in our country that cannot afford them.
Therefore, we expect that semi demand will continue to surprise on the upside due not only to strong demand from smart devices but also from the need to expand the capacity for data centers, the cloud and gaming.
We recently added to our portfolios some financially strong companies with great managements and strong business plans that will thrive on the other side, gain market share, increase profitability, cash flow and dividends. Fortunately for us, these stocks got unfairly punished by program trading taking no prisoners which created great entry points for us.
As of Friday morning, the number of worldwide coronavirus cases has exceeded 1,617, 204 with more than 97,039 deaths. The U.S alone accounted for 466,299 cases with more than 16,686 deaths. While the numbers are horrific, it appears that cases are cresting in Italy, Spain, France, Germany, Australia, New Zealand, New York, California and Seattle. Social distancing appears to be working everywhere limiting the growth of cases and number of deaths. But we cannot let up too early which may allow for reacceleration in the number of cases.
We are convinced that opening our economy, even to the new normal, will be a very slow process, by region, for the reasons already stated. Therefore, the Fed and government are not nearly done yet. Both will do all that is necessary to provide a bridge to the other side which may not begin in earnest until mid-2021. While a multi trillion-dollar infrastructure program is right for so many reasons, we do not see both parties agreeing to one until after the November election. Even if one is passed this year, it won’t probably be implemented until 2021. But, better late than never.
Stay the course investing in the winners including some special situations in the new normal while avoiding companies whose future and financial strength are clearly questionable today and on the other side. The Fed and government will continue to do all in their powers to provide a bridge to the other side, but the recovery will be an elongated U rather than a V. It will take longer and take more assistance than currently funded.
Monetary authorities and governments abroad whose countries are inflicted with the virus are also providing all the financial assistance and liquidity needed to get to the other side. While China is recovering, we expect the Bank of China to increase monetary easing further while the government expands fiscal stimulus to offset weakness in exports due to a sharp drop in foreign demand. The world will be awash with liquidity pushing investors further out on the risk curve. But do not get complacent as all boats will not be lifted in the end. We also do not own bonds, the dollar, oil, non-residential real estate, and private equity whose asset valuation is at risk.
Remember to review all the facts; pause, reflect and consider mindset shifts; turn off your cable news; do independent research and… Invest Accordingly!
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.