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Hang In There

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If 2020 were a Marvel movie, this might be the moment when the Avengers show up and save the day.

Wishful thinking, I know.

Unfortunately, it appears the United States isn't in wave #2 of the pandemic because we never really left wave #1. Due to the uncertainty, no one really knows how financial markets or the economy will react in the coming months.

In a couple weeks I'll share my thoughts about the second quarter of 2020. In the meantime, here are some thoughts about the second half of the year.

Reasons for Optimism

  1. Solid economic foundation
    The U.S. economy was healthy leading into the COVID-19 crisis. The ensuing recession was caused by an external shock, not a typical end to the business cycle driven by economic overheating. This could hold promise for the recovery.

  2. Attractive value vs. bonds
    With bond yields down (and prices up), the gap in the value between stocks and bonds, as reflected in the equity risk premium, is wide. This suggests investors can potentially realize greater reward from stocks.

Reasons for Caution

  1. Hidden vulnerabilities
    The lockdown-driven decline in economic activity and spike in unemployment has left the U.S. economy more exposed to risks. It remains to be seen whether there are any hidden vulnerabilities in the system, including hiccups in reopening progress. Markets do not like uncertainty.

  2. Risk of second wave of infection
    COVID-19 is a novel virus, meaning it has no exact precedent. A new round of infection is possible and its burden on the health care system and potential for renewed closures is unknown. The upside is that countries would enter a second wave wiser and more prepared, with availability of greater testing, contact tracing, protective gear and drug interventions.

  3. Heightened geopolitical tensions
    The U.S.-China relationship is further strained since the COVID crisis, defined by greater competition and less cooperation. Bouts of market volatility are likely should tensions flare. In addition, U.S. onshoring and the likely move toward deglobalization will have margin and inflation implications down the road.

  4. Absolute valuations are not cheap
    Stock prices are attractive relative to bonds, but by the most common measure of valuation, P/E ratio, they are not cheap. Stock prices relative to 12-month forward earnings per share stood at 21x at the end of May. Pandemic-related uncertainty has made the earnings outlook for many companies blurry at best.

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For better or worse, it appears very few people in the U.S. are prepared to endure another shutdown. So, a few reminders:

  1. Wear a mask.

  2. Wash your hands.

  3. Get some exercise.

  4. Wear a mask.

Reading / Watching / Listening / Playing

Here's what's keeping me busy in my spare time:

  • The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy by Stephanie Kelton. To some, a book that suggests deficit spending isn't the monster we've been taught to fear is heresy. I haven't made up my mind yet, but I'm open to learning more about Modern Monetary Theory (MMT). In July, I'm joining a book club to read & discuss this book.

  • Floor is Lava on Netflix. I'm watching this ridiculous game show with my kids. Full disclosure: I was the one who found this series and lobbied to watch it with my kids. It's both dumb and fun, which is just what I need at this point in 2020.

  • Revisionist History, season five. Malcolm Gladwell's podcast returned last week to start its fifth season. So far, Gladwell continues to pull together seemingly different stories or facts with fascinating results. I find it best to enjoy this during a mid-day walk when I need to clear my head.

  • Assassin's Creed: Odyssey. We won't be traveling this year, for obvious reasons, so I've been enjoying this game on my Xbox One. I may not be able to travel to modern Greece, but at least I can explore ancient Greece via Ubisoft's amazingly well-rendered game.