Dalton — On Friday, July 31, the additional $600 in weekly federal unemployment benefits, which were part of the CARES Act, expired. A few days before that, I wrote about how, according to www.policyuncertainty.com, economic policy uncertainty was “through the roof.” Well, political risk is leading to column uncertainty. Specifically, I am uncertain whether between the time I submit this column and the time your eyes find it, if Congress might have written a passable fiscal stimulus deal for the White House to approve.
Congress typically recesses for the month of August (that’s not a typo). However, on Saturday, Aug. 1, they worked on it. Rep. Nancy Pelosi, Sen. Chuck Schumer, Secretary of the Treasury Steven Mnuchin and Chief of Staff Mark Meadows had a three-and-half-hour meeting, the most extended session they’ve had together yet. They said it was very “productive” and made “substantial progress,” which is impressive since three and a half hours is a part-time job. Meadows even bragged that they were working on a Saturday. (Gee. Thaaaaanks.)
They also met on Sunday but, apparently, that didn’t go well. In separate interviews, Pelosi and Mnuchin made it clear that they remain far apart on an agreement. Mnuchin said, “the Democrats right now are insisting on over $1 trillion to state and local governments, and that’s something we’re not going to do.” As I’ve said in a previous column, if we don’t get state and local aid in a fiscal package, I suspect that, in 2021, the U.S. will experience a double-dip recession.
By Monday afternoon, discussions were again at a crossroads. President Trump said that he’s having the White House lawyers examine how he can use executive orders to unilaterally extend eviction moratoriums and extend enhanced unemployment benefits.
As of this column’s deadline on Tuesday, there is only silence coming from Capitol Hill.
If a fiscal stimulus plan is passed after this column comes out, I’ll address it later. If not, I guess I’ll be talking about the next recession.
Longtime readers will recall that, in 2019, I had been calling for a recession to occur in 2020, often citing the inverted yield curve and the Duke Fuqua CFO survey. I was right on the recession call, but I didn’t call the pandemic correctly. As late as February 2020, I thought that COVID-19 could still be contained. Fortunately, at least I was investing in preparation for the recession I thought was coming (even if it wasn’t the recession the pandemic ended up giving us). But as Sir John Maynard Keynes once queried: “When the facts change, I change my mind. What do you do, Sir?”
It didn’t take long for me to change my view. Within a span of about three weeks, I went from investing for a much different recession to seeing such a big problem that I was scouring the land to get personal protective equipment to frontline medical workers.
There is a difference between being uncertain and being wrong. I was wrong in February to think that COVID-19 would be contained. But I was quite certain that, with or without COVID-19, there was going to be a recession in 2020. That’s really my primary job: determining when we might go into and come out of a U.S. recession and setting the proper investment allocation to reflect that. My second job is to tell you about it. But today, I’m uncertain what to say to you because I don’t know what the heck Congress is going to do. Last week I recommended selling your weaker positions and being ready to reemploy the proceeds over the coming weeks and months in case there was an opportunity to take advantage of any dip in stock prices as we wait for a new fiscal stimulus package. Prudent advice? I think so. But it also reflects how uncertain I am right now (or, to be less generous, how little I know).
Why did I drag you through that timeline? One day I was optimistic that coronavirus could be contained, the next day I started gathering and buying 50,000 masks (although FEMA held onto 15,000 of them) to donate to the community. Because in this business, you’ve got to be nimble. As an investor, I feel more aggressive today than I did any time since late 2019. But what if we don’t get what I consider to be a good fiscal stimulus plan? Given those new facts, I may change my mind and get defensive. What will you do?
Bits and pieces
- Gross domestic product was down an annualized 32.9% in the second quarter of 2020. (And, by the way, isn’t it weird that nowadays that isn’t a worldwide headline?)
- As of Aug. 3, the Atlanta Fed’s GDPNow model estimates GDP growth of 19.6% in the third quarter of 2020. U.S. economic growth is bouncing back rapidly, but the rate of acceleration has slowed in recent weeks.
- For the first time ever, U.S. fiscal and monetary stimulus for a quarter exceeded GDP for the same quarter. The combined fiscal and monetary stimulus was about $5 trillion (according to how AllianceBernstein calculated federal reserve policy). Nominal GDP was $4.85 trillion.
- As of July 31, of the 312 S&P 500 companies that reported earnings for the second quarter of 2020, 82.1% have beat analyst expectations. That compares to a long-term average of 65%, and the average of the prior four quarters, which was 71%. The technology sector shows the best results, with a 90% EPS beat rate — a 13-percentage-point increase relative to its typical beat rate. However, Consumer Staples and Materials are no slouches, showing the best comparable beat rates. Each has a 20-percentage-point increase relative to its typical beat rate.
- Analysts expect an earnings growth rate (or lack thereof) for the third quarter of 2020 to be -23.1% lower than the third quarter of 2019, with no S&P 500 sector expected to show year-over-year improvement. I think that is overly negative and is a tailwind for stock prices.
- According to the American Association of Individual Investors survey, the number of bears is more than double the number of bulls, which is a positive sign for stock prices for contrarians like me.
- On Friday, July 31, Fitch Ratings gave the U.S. a “Negative” outlook on its AAA rating to “reflect the ongoing deterioration in the U.S. public finances and the absence of a credible fiscal consolidation plan. The full statement can be found here. On Aug. 5, 2011, Standard & Poor’s lowered its long-term credit rating on the U.S. from “AAA” to “AA+.” The stock market was already correcting at that point, dropped about 6% more, and then took a few months to break above and stay above those Aug. 5 lows.
- On July 29, Fed Chairman Jerome Powell held a press conference and reiterated the Fed’s position on interest rate levels by saying: “We’re not even thinking about thinking about thinking about raising rates. We’re totally focused on providing the economy the support that it will need.” That’s a lot of “not thinking abouts,” and that’s good news for stock prices.
- The average August return for the S&P 500 is 0.63%. In election years, such as 2020, August not only performs better than its overall average, but with a return of 2.87%, tends to be the best month of an election year.
And lastly, some housekeeping: There will not be a “Capital Ideas” column for the week of Aug. 12, 2020, but I’ll see you the following week.
This article originally appeared in The Berkshire Edge on August 5, 2020.