It’s all about the Fed…
Last week’s 1800 point one-day drop in the Dow was a reality check on the recent historic run-up of risk assets in the last seven weeks. As mentioned in previous updates, we still believe the market is ahead of itself relative to future earnings and what will be a slow re-start of the global economy. We are getting a glimpse of our economic future by following the progress combatting the Coronavirus in China and Europe, which has been slow but steady.
Meanwhile, US multinational companies like Starbucks and Visa have provided tepid outlooks well into 2021. With that in mind, valuation becomes important when making buy and sell decisions. The current market is expensive by any measure, but there are still pockets of value where we are focusing our attention. There are also examples of extreme speculation, which we have not seen since the dot com era. Bankrupt company stocks like Hertz have tripled overnight, and if you review the percentage gainer boards on any given day you see Chinese Fintech stocks up 100%, or small companies increasing 5X to 10X in value over the course of a few days. We are trying to stay out of that fray but it does give one pause when you see the market turn into a casino driven by unprecedented Fiscal and monetary action.
Take a moment to view this short video on the Starbucks phenomenon.
The Fed is still positioned in a historically aggressive stance not seen since the Great Recession, and has made it clear they have plenty of firepower left. Some recent comments by Chairman Powell indicate that the Fed is:
- Not close to limits on its balance sheet: the "balance sheet can't go to infinity," but is comfortable with where it is now;
- Committed to using its tools to do whatever it takes to help the economy; and
- Comfortable crossing a lot of red lines that hadn't been crossed before.
Over $9.5 trillion has been committed or spent on the fiscal and monetary side, which represents about a 44% replacement of US GDP. If the market and economy falter, here are some other proposed stimulus measures:
- $3 trillion House plan
- $1 trillion in state relief
- Additional $1,200-$2,400 consumer relief payment
- $843 billion payroll tax cut
- Eliminate payroll taxes that fund Social Security and Medicare for balance of year
- $900 billion advance on Social Security benefits up to $5,000
- $1 trillion infrastructure spending
- Term Auction Facility for banks as an alternative to discount window
- Broaden range of firms that can borrow from the PDCF (Primary Dealer Credit Facility)
Our plan is not to fight this unprecedented liquidity even if we see a significant disconnect between the economy and financial assets. Volatility should increase over the next 90 days as dismal Q2 earnings and economic numbers come through, but time is on our side as the pandemic fades. We are willing to accept higher valuations given the low level of interest rates, but it should be a stock picker’s market like we have not seen in a decade or more. Our continued focus will be the “barbell” strategy, investing in high growth companies that will lead the charge into the new economy (accelerated by Covid-19), balanced by dividend payers whose balance sheets will allow them to survive and thrive during this volatile period.
Please let me know if you have any questions via phone at 804-774-2087 or email at Jesse.Ellington@middleburgfinancial.com.
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