The Stock Market Rebound Continues

Since our last update stocks have continued the impressive rally that began off of the March 23rd low. Progress on the medical front, reopenings in the U.S. and Europe and market support from the Federal Reserve have been the primary drivers of the rally. Mega-cap tech and healthcare stocks have been the market leaders this year. Recently we have seen the more economically sensitive small caps and energy stocks outperform, which could mean the market believes the economic recovery may be stronger than expected. Unfortunately, on the flip side banks and industrials have continued to underperform. Also, the 10-year Treasury rate is .68%, not far off of the closing low of  .56%. We would like to see this rate move back above 1%, which would indicate more optimism about economic growth. Let's take a look at other recent developments. 

Jobs Market

The April jobs report showed the unemployment rate increasing to 14.7%, but in reality the number is much higher. This is due to the fact that government statisticians do not include as unemployed those who have been laid off but have not started to look for a new job. If you add these individuals in, the unemployment rate is closer to 20%. In the past six weeks over 33 million people have applied for unemployment insurance, which is over 20% of the 160 million people who are in the labor force. Several surveys have indicated that the overwhelming majority of workers filing for unemployment benefits believe that they will be rehired as soon as business conditions improve. 

According to the Fed, one in every three of the bottom 20% of wage earners have lost his/her job. As states continue to reopen, it will still take a long time for many businesses to return to pre-corona activity levels. Some financial analysts believe that the shut down should have little long-term ramifications due to the fact that workers who were laid off would be kept afloat with a combination of the stimulus checks and enhanced unemployment benefits. Businesses would then rehire these workers as soon as this summer as life returns to normal. Reality is that many businesses will never reopen and many more that do will have an uphill battle to survive in the long run. It is not unrealistic to expect the unemployment rate to remain in double digits well into 2021. Keep in mind the unemployment rate peaked at just over 10% during the financial crisis, so these are shocking numbers. Several surveys have indicated the the overwhelming majority of workers filing for unemployment benefits believe that they will be rehired as soon as business conditions improve. If most employees are rehired that will go a long way towards returning to a healthy economy.

Stock investors appear to be wagering that a large percentage of the unemployed will quickly be rehired or find a new job. We hope they are right. 

Coronavirus

Yesterday the U.S. had its fewest new cases and fewest deaths since March 29th. Obviously this is a positive development and even more so considering a lot more testing is taking place and many states have recently reopened. We want to point out some interesting information from Fundstrat, an independent financial research firm. They have pointed out that if you take out deaths from the New York tri-state area and nursing homes there have been 19,483 deaths due to the coronavirus. For context last year on average 7,700 people died per day in the United States. Of course, every death from coronavirus is very difficult for friends and family, but the U.S. coronavirus death total is heavily skewed to the New York tri-state area and residents in nursing homes.

The Fed

We referenced the support the Federal Reserve has provided to financial markets. Here you can see the large increase in the size of the Fed’s balance sheet as it purchases financial assets.

While this is a staggering increase in just two months, the Fed has just gotten started. Many analysts believe the balance sheet will exceed $10 trillion by the time the Fed ends asset purchases. While there is no doubt the Fed’s announcement that they would start purchasing investment grade bonds on March 23rd stabilized the bond market and triggered the major rally in bonds and stocks, down the road the Fed will have a very difficult time shrinking the size of its balance sheet. Their immediate goal was to prevent a coronavirus economic depression; the long-term issues that come with a $10 trillion balance sheet will be dealt with later.

After the fastest 35% decline in history, the stock market has had a furious rally off the March 23rd low in the face of awful economic news as well as the peak of new coronavirus cases and deaths. Looking forward we will be paying close attention to how many businesses are able to return to profitable activity levels. States will continue to reopen, but it may take the consumer longer than hoped for to feel comfortable resuming many of their previous activities. In the meantime it is expected that the worst of the job losses is behind us and the second quarter will be the low point for other economic data as well. We continue to hold only quality names and some extra cash to deploy as opportunities present themselves.