Who’s Picking up the Covid Cheque?

We’ve just lived through the shortest bear market on record. It lasted just 33 days.

For most, the losses of the Q1 panic are recovered or at very least now fall into the category of the average intra-year setbacks within any year in the markets.

But don't be shocked when the internals of the market suggest a pause would be very beneficial.  

Not a huge one I suspect, but at least a pause that refreshes things.

The Dow Jones has become the work horse of the major indices. But don't let some of the big numbers confuse you - Boeing's recovery alone has added a ton to the Dow. 

And now with some of the other industrials catching up with the news in the jobs report last Friday, the averages have, well, stunned most of the experts.  

The doomsday gang was looking for eight million more jobs getting toasted.  

They were only wrong by about 10.5MM…give or take a hundred thousand. 

The Bad News? 

We have a huge bill to pay for this event.  

Taxes will rise - and while I don't suspect we can muster it up - a little inflation would help.

Long after all the blaming is complete, this event will go down as the most expensive, self-inflicted wound any society has ever placed on itself.  

And, we cannot overlook that the second quarter (bottom of the barrel) data is set to hit the headlines during the very slowest part of the summer haze. 

The latter sets the stage for one last round of opportunity (read: good deals, as short-termism may get another run at the tape during the deepest and murkiest portion of the summer lull.  

But do not fret.

In fact, with the major averages spread from either roughly unchanged (tech) and still being off by about 10% or so (broader market NYSE), we should all be pausing and thanking our lucky stars above, as well as:

• Expect a resting point as we trek back up this mountain. It serves few long-term benefits to go up too far too fast - or up in a straight line of sorts.
• Avoid the shock that most would now fee if they’d just awoken from a long nap, read the headlines that the world was tediously coming out of a self-induced complete economic closure and shutdown, and the markets were where they are now. 
  
  

Some Insights...

The Chinese COVID-19 virus is now old news. 

Notice the "shock effect" is dwindling and the press senses it.  

The only prickly thing that will draw attention eventually is that we were all told to shut down the world and expand our social distance to save lives. The recent unrest in the streets followed very little of that mantra. And no further breakouts of illness will cause many of the experts to lose credibility.  

That’s not a political position, just an observation.

Markets Disconnected?

The markets think “next.” We humans think about the “now.”

The great news is that away from the white-hot lights of the press coverage, the growth rate of new cases and deaths is decelerating just about everywhere in the world. 

As more testing unfolds, the infection fatality rate is increasingly estimated to be pointing more towards the range of 0.06% to 0.16%—which is similar to that of other illnesses.

Many states are reopening. And just as important are how the key financial market and economic fundamentals have been improving on the margin, and at the same time our fear of Covid-19 has been tempered.

The market and its insight into the future suggest the virus is no longer a big source of concern.  Admittedly, this will take a bit longer for many to wrap their brain around.  

So, complete shutdown, anarchy and a very dark horizon, all to be erased and on the mend in a short 33 days?

Yep. And remember we suggested many times during the last 2 years that, "If you think things are moving fast today - wait for the 2020's to kick-off..."

The May jobs report made it abundantly clear that the economy is doing much better than feared internally.

And, hard as this may seem, as investors we will all need to work hard to forget about Covid-19, the shutdown, and the economic damage caused as we head into the future, since these are all on the mend and the market has moved past it. 

It’s no longer a question of when things start to improve. The question now is how fast they will improve from here as more daylight shows over that once dark horizon.

We’ll continue to track the key measures of financial and economic fundamentals, some of which are updated in the following charts from Scott Grannis of the Calafia Beach Pundit: 

Ever more steadily, travellers are coming back.  

Lots of improvement is still to come but it’s a start!

Lots of trucks are moving lots of materials and rest stops (as I saw over this past weekend) are packed, and truck stops have queues again for gasoline.

Fears about debt markets have once again receded to more normal spreads.  

The shape of the yield curve is also suggesting a solid bounce-back from soon to be released - very ugly - GDP data.

If there really was a "COVID-19 credit crisis" it has declined in intensity extremely quickly. This is good news that’s likely helped by the super-fast actions of the Fed. They learned much from the 2008-2009 episodes - mainly about the importance of confidence to move forward over any hurdle.  

Demand for cash is at all-time highs, shattering records.  

This is what we call the real fear trade.  

And as ugly as the data has been it is all improving rapidly on the whole.

Looking Ahead

Unfortunately, the nastiness of politics will soon be front and centre again.

That won't help anyone so do your best (as we will) to ignore it.

An item we will want to see addressed is the Fed reacting to the dramatic improvement in the economy—and the rebound in confidence which is sure to follow—by addressing the extra cash flooded into back reserves. 

Doing so will avert what is sure to the next monster from the bears - a repeat of the 2008-2009 chatter about inflating burning us all at the stake.

The upside remains the surprise.

Mike Williams, TruVestments