Major U.S. indices posted strong gains last week as analysts and investors alike continue to watch and scratch their heads. Corporate earnings are off significantly, unemployment will hit levels not seen since the end of World War II, and no one knows for sure if there won’t be a second wave of new Covid19 cases. I am an optimist by nature. However, I do believe Americans and the rest of the world face a long road ahead. One that is full of potholes and unexpected twists and turns. I borrowed the title of this weeks market commentary from the Saturday edition of the Wall Street Journal.
Let me first say I agree wholeheartedly with Warren Buffet when he said he wouldn’t “bet against America”. We were the strongest economy going into this pandemic. I believe we are in the best financial shape to successfully emerge from it. However, that doesn’t mean there won’t be challenges ahead. Below are a few things we need to be aware of.
- 63% of Restaurant operators said they expect lower staffing levels in six months than a year earlier. Consumers are anxious to get back to a normal life where dinning out is a common occurrence. However, how long social distancing is required will continue to hurt restaurant profits. This is troubling since restaurants work on razor thin margins to begin with.
- Uber announced another 3,700 job cuts. This is in addition to the 3,000 already announced. With an increased amount of the workforce working from home, they save on gas and Uber rides.
- Saving on gas brings up another point. Now that the U.S. has become energy self-sufficient and a net-exporter of oil, the reduced demand for crude is not only hurting OPEC but also domestic shale and fracking companies. How long Americans will be willing to work and vacation at home remains to be seen, but most analysts expect it to last a few years.
- The industry that will suffer the most is travel and hospitality. Companies will restrict travel to what is absolutely necessary and consumers fearing a re-emergence of Covid-19 are cancelling travel plans for 2020 and re-booking them for 2021.
All of these challenges will have a “ripple effect” for other areas of the economy too. If people fly less, hotels book fewer rooms, restaurants sell fewer meals and cabs have fewer fares. Also, retail sales decrease since shopping is the number one activity of travelers. This means more of a challenge for the U.S. to get back to the employment levels we saw earlier this year. The years ahead will be difficult ones to be sure. But just remember what Mr. Buffet said.
The Markets and Economy
- In a recent interview on CBS News “60 Minutes” program, Federal Reserve Chairman, Jerome Powell said the U.S. economy could take more than a year to recover from the economic shock of the coronavirus pandemic. “It’s going to take a while for us to get back, ” Mr. Powell said in a rare television interview. He went to say, “The economy will recover. It may take a while…It could stretch through the end of next year. We really don’t know.” In a prepared speech delivered last week via videoconferencing before the Senate Banking Committee, the Fed Chairman said the central bank will use it’s “full range of tools to support the economy.”
- China plans to impose new national-security laws on Hong Kong. After taking control back from Britain in 1997, residents had hoped officials in Beijing would continue to honor their pledge to allow a western-style rule of law and freedom. How far China intends to take the new measures could affect Hong Kong’s role as a global financial center.
- For the first time in more than a quarter-century, China’s leaders have accepted the inevitability of not hitting growth targets during the pandemic. Premier Li Keqiang said leaders have abandoned their efforts for hitting annual growth targets for 2020.
- While Mr. Powell believes it may take a year or more for the U.S. economy to recover, 80% of Europe’s top CEO’s believe it could take up to three years for their economies to recover.
- Pier 1 Imports has abandoned plans to scale down the number of retail stores in an effort to survive. Last week, the company announced plans to close all remaining stores after 60 years in business. In it’s bankruptcy filing, J.C. Penney Co. said they plan to close 242 stores (30%) to cut expenses by about $1 billion.
- The U.K. issued its first bond with a negative yield as investors prepared for the possibility that Britain joins other European countries in having negative interest rates. A negative yield means investors are guaranteed to get back less than what they originally invested. It is a function of central bankers pushing interest rates lower, into negative territory. The goal is to encourage investors to put their hard-earned money to work in the equity markets or business investments in hopes of stimulating their struggling economies.
- Just as U.S. automakers opened factories and restarted production, Ford Motor Co. announced plant closures in two states. A few employees had tested positive for Covid-19. The automaker believes the employees were infected outside of work but closed out of concerns for safety until the situation could be assessed.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Consult your financial professional before making any investment decision. You cannot invest directly in an index. Past performance does not guarantee future results.
Note: All figures exclude reinvested dividends (if any). Sources: Bloomberg, Dorsey Wright & Associates, Inc. and The Wall Street Journal. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
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