"We are now having 40-plus thousand new cases a day; I would not be surprised if we go up to 100,000 a day if this does not turn around”
Anthony Fauci, director of the National Institute for Allergy and Infectious Diseases
The global financial markets continue to defy the rising number of coronavirus cases, causing investors with cash on the sidelines to question, if they have missed the boat. Although an election year, at Samra Wealth Management we believe there is a heightened probability of a pull-back in Q3. In our March issue of The Samra Report, “Black Swan Event: Coronavirus (Covid-19)”, we presented our view “it will likely get worse, before it gets better, then slightly worse again.” Our consensus remains unchanged, as select economic data may have investors viewing the markets through rose-colored glasses. This month’s issue of The Samra Report aims to provide investors with a look through our lens, in layman terms.
As a consumer thinking of making a big-ticket purchase this year, whether it be trading-in your car for a newer model, taking a vacation, or upgrading home appliances (these purchases fall into the consumption spending portion of our nations GDP, at 68%). Given the current economic climate, financial uncertainty, and barriers to transact you’re likely thinking of putting these purchases off until you have reassurances of stable income, safety, and freedom to utilize your purchases. Now, think of a corporation or government agency through the same lens. Corporations such as PSE&G or government agencies such as the United States Forest Service are likely to delay such purchases. These purchases referred to as capital expenditure fall into the investment spending portion of our nations GDP, at 20.3%. Although the economy and the financial markets have little correlation, investors should consider the impact lower consumption and lower investment spending has on employment. Under normal circumstances, without government intervention in terms of stimulus measures, a decrease in employment would correlate to a decrease in Gross Domestic Income, or income per capita.
This past Friday, investors once again appeared optimistic as household spending on goods and services rose a record 8.2% in May, more than double the prior all-time high on records dating back to 1959. Record household spending in May, while first quarter Real Gross Domestic Income decreased 4.4%, should have investors cautious. Furthermore, the areas of tourism, entertainment, retail, food & beverage, and automobiles have come to a near halt, suggesting a fundamental flaw in how data is perceived. What many may fail to understand is Household Spending reported by the Bureau of Labor Statistics is survey based, and not accurately data driven.
This week the Dallas Fed Manufacturing Index painted another positive picture, suggesting a V-shaped recovery in manufacturing. However, a closer look into the underlying (survey) data shows how businesses are doing in comparison to the prior month, and not an absolute level. U.S. Manufacturing is getting worse, with only 29% of survey respondents seeing a better economic future than they saw the previous month. As the coronavirus continues to plague Texas, Arizona, California and Florida, we expect manufacturers to lower output and to continue with employee lay-offs.
The U.S. Bureau of Labor Statistics reported “total non-farm payroll employment rose by 2.5 million in May, and the unemployment rate declined to 13.3%”. At Samra Wealth Management we believe payroll numbers were artificially inflated due to government stimulus measures, specifically the Paycheck Protection Program (PPP), that provided a loan with a requirement funds had to be paid out as wages within 8-weeks of receipt.
At the close of 2019, we believe there were few hurdles in the path of President Trump securing a second term in office. However, a perfect storm scenario with the coronavirus impact on national health and the economy, combined with a Black Lives Matter movement with little signs of slowing down, now has political pundits and investment firms factoring in the potential for a Biden win. A Democratic win, in the near term would likely shock financial markets, essentially hitting the reset button on trade deals and capital expenditure, however, in the intermediate and long-term a move away from trickle-down economics could prove for a sustainably healthier financial market.
Finally, June’s issue of The Samra Report: Where’s Warren, should have caused investors to ask why Warren Buffett and Berkshire Hathaway is holding $137B in cash, that could have been used for stock repurchases or new acquisitions. Is it possible Mr. Buffett does not believe this is a great time to buy? At Samra Wealth Management, our consensus remains unchanged, and the economic climate is likely to get worse before it gets better. As the media highlights a potential second wave of the coronavirus, we would argue the data suggest we are still in the midst of the first wave. As of June 23rd, the Financial Times reported California, Arizona, Texas and Florida were 85 days behind New York and New Jersey, in terms of new cases on a seven-day rolling average, suggesting a first-in, first out scenario. With California ranking first in GDP by State, Texas second, and Florida fourth, the economic impact could be catastrophic.
"Analysts are flying blind, since many companies have stopped providing earnings guidance, citing the uncertainties of the pandemic. Nearly 200 companies in the S&P 500 have withdrawn their customary forecasts for the year"
Andrew Ross Sorkin, CNBC co-anchor, founder & editor of DealBook, author of Too Big to Fail.
Disclosure: All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. The information contained here does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities.
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