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True Partner article: Let’s not normalize what’s not normal

That there are plenty of reasons to be worried about the economic future is not necessarily new. Even prior to COVID-19 doubts lingered on the market valuation’s viability, doubts on whether a ‘new normal’ had arisen. Economists are famed for having predicted ‘eight out of the last three recessions’. But at this moment, one aspect does stand out compared to the past. The potential storm clouds which are currently on our horizon do so with a specific timing involved. This summer appears to be a critical moment of time, for various reasons:

• Some key US stimulus programs will expire soon…

The various programs enacted around the world have been able to mitigate the initial impact of mass job losses following the COVID-19 lockdowns. Many were crafted in a hurry and with an implicit understanding that the economic impact, while sizeable, would be short-lived. One of the specific aspects in the US approach is the finite end dates. The weekly supplement unemployment benefits from the Coronavirus Aid, Relief and Economic Security (CARES) Act will cease as of July 31st. The Payroll Protection Program (PPP) expires even earlier, on June 30th.

These programs have been instrumental in lessening the economic shock of COVID-19. Analysis1 even suggests that a notable number of the unemployed were financially better off under the program than in their jobs, a factor that may have been instrumental in the relative robustness of consumer spending, which is of overarching importance to the US economy. But following the positive surprises on the unemployment report (both the ADP survey and the non-farm payroll data) potential extension of the programs remains uncertain at best.

Other programs, such as the forbearance on mortgage payments or student loans will expire in the near future as well. All these programs have temporarily put additional cash in the hand of the US consumer, but the supplemental unemployment benefits will cease. And a forbearance implies that the money remains due, albeit later. Thus with these end-dates approaching, it remains to be seen this Summer whether the US economy will be able to swim by itself once the life vest comes off and whether enough employment will be created to compensate for those sectors of the economy which appear structurally upended by the post-COVID reality. Until there is a vaccine or herd immunity, the travel, hospitality and entertainment industries might not bounce back.

• A less forgiving earnings cycle…

The Q1 2020 earnings season was mostly remembered for what did not happen: forward guidance. Smack into a global pandemic, companies could be forgiven for not being able to provide clarity on the near future. But now that a quarter has passed, “because COVID-19” may not pass muster anymore. Are the profound changes in how we work, live and learn a zero-sum game with both winners and losers, or will the overall pie be negatively impacted?

It is not that expectations are low, as the sharp market recovery from the lows of March has propelled the earnings multiples at which markets trade. When a V-shaped recovery appears priced in, some evidence supporting this thesis ought to be present in corporate results and expectations. Particularly for those companies where the current situation is a tail wind. If the Grubhubs of this world do not have a bumper quarter now, when will they ever?

• The US election cycle heating up…

Whereas the Presidential race is front and center in the media, for markets the most interesting one might prove to be the battle for control of Congress. Prior to the pandemic the House was deemed to stay Democratic and the Senate was deemed to stay Republican, leaving the status quo in place. Even if Democrats would capture the White House, a Republican controlled Senate would prevent meaningful policy changes (similar to what the Obama administration experienced throughout most of its tenure).

Multiple crises currently engulfing the US have put the Senate firmly in play, with the odds of a Republican majority sinking to 40% on betting sites (however, given that some Democratic leaning senators formally caucus as Independents, this does not mean the Democrat majority is quoted above 50%). With the primary process in full swing, developments might crystalize quite ahead of the November election date. Just as an example for political wonks, a wildcard could be the ruby red state of Kansas where a primary win by the divisive Chris Kobach could put one of that state’s Senate seats in play. For similar reasons, the races in Arizona or Georgia (where both Senate seats are on the ballot) carry importance quite beyond the presidential ticket.

A full Democratic sweep would open the door to policies which might not be market-friendly, in the areas of healthcare, environmental and other regulation and anti-trust legislation. Also in the cards would be a reversal of the 2017 tax cuts which are said to have been a key driver of the equity rally. Elizabeth Warren, whose brief rise spooked markets earlier in the election cycle is still in the running as Biden’s running mate and in order to keep the progressive Bernie Sanders wing of the party motivated, Biden cannot pull an ‘etch-a-sketch’ and move to the center on economic policy approaching November.

•…as well as COVID-19

In the US, the tragic death of George Floyd, and the outpouring of frustrations and desires for meaningful change has shifted the media focus away from COVID-19. As the virus numbers out of the hotspots New York and New Jersey have also improved, it appears markets have bought into the optimism on reopening. But such optimism, shared by governors of states such as Texas, Florida and Arizona, may be misguided. The virus did not disappear over the Spring as hoped, and conventional wisdom suggests a risk of a second wave come Autumn. The escalation in Latin America does not bode well from that perspective, nor does the experience in Iran where a second wave followed an early reopening.

Given the incubation period involved, a potential second wave as the result of reopening (or hopefully the lack of such wave) would start to be visible over the coming months. The best news for the world and for the markets would be the silver bullet of a vaccine. With unprecedented efforts all over the world, a positive surprise could also spring up over the Summer. (Being volatility traders doesn’t make us pessimists per se.)

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1. Elle Koeze. “The $600 Unemployment Booster Shot, State by State”. The New York Times, April 23rd 2020


Published by Ralph van Put

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