As the first half of 2020 has drawn to a close, we can only be amazed by the developments that have taken place at such a breakneck pace in a matter of just six months. Boundaries have been broken on the monetary front on both sides of the Atlantic, gargantuan fiscal policies have been put in place and are still in the pipeline, the European project has been put to great tests, half of the world’s inhabitants have been confined to their homes at some point during the last months… but above all, the human death toll due to origin of these developments, i.e. COVID19, has surpassed 500,000 and continues to increase. Stock market behavior has rarely been so erratic. Indeed, one of the biggest market decline in a couple of weeks’ time during Q1 2020 was followed by the steepest market advance in just 50 days. Bear and bull markets compressed in a timeframe of a couple of months. S&P500 Index had its best quarter since Q4 1998 with a gain of 20%, curiously enough while at the same time the US daily COVID19 patients continue to accelerate and have now surpassed 50,000 (see chart 1). Thus, the dichotomy we referred to in our last update between economic reality and the stock market has certainly not decreased, although one might point to the improving Purchasing Managers Index (PMI) figures, better retail sales data in Germany or the encouraging unemployment figures in the US. We would caution against extrapolating these figures for the next coming months/quarters and thus assume a full V-shaped recovery as a base scenario. Monthly figures such as PMI’s or employment data lose relevance as these data points are released after the ‘Great lockdown’ with near-zero activity in many sectors. The two successive strong monthly US unemployment figures are certainly encouraging but need to be put in the right perspective: Only 7.5 million jobs of the total 22 million jobs lost since March have been clawed back, while last month figures indicate a surge in permanent job losses to 2.9 million. With the recent spike in infections in several US Southern states and ensuing partial lockdowns of some labor intensive sectors such as leisure or hospitality (which saw 2.1 million additions in the last monthly employment data but the survey was done before the recent spike in daily infections), unemployment figures will be less stellar for August.
In our view the single biggest reason for the resilient stock markets relates to market participants’ gradual realization that no government in developed markets will ever resort to shutting down its entire economy, even if a second bigger wave of the coronavirus hits our shores. But at the moment, in countries like the US, the first wave of COVID19 is not yet under control, prohibiting a full 100% re-opening of the economy. Hence some subsectors (for example the ones relying on crowds) will continue to suffer and will need to adapt to this 90% recovery reality (until a vaccine is widely available) by reining in capital and operating expenditures. We expect more companies to revert to layoffs of personnel (where possible taking into account the legal aspects of the Kurzarbeit schemes in EU or Payroll Protection Programs in the US). Therefore, we would be wary in assuming the strong retail figures we have seen in some countries will be sustained beyond a short period where pent-up demand was satisfied. With Q2 results at our doorstep, we will be closely scrutinizing what managements have in store with regard to cost containment measures.
