Right now I am beginning to feel like the guy who jumped off the 50 story building. Half way down someone yells, “How are you doing?”
“So far, so good.”
While the S&P 500 is within ten percent of the end of last year and my clients are even with the end of last year, there are dark clouds forming. Will they blow over, dump some rain, cause a downpour, or turn into a thunderstorm? Will COVID-19 infections continue up? Will the government stimulus run out? With spending way down, how does that affect the overall economic outlook? What is China doing? How close are we to a vaccine? Those are the topics I am addressing for my clients in their portfolios, and I believe they are concerns you may want to address in yours.
You might think, with the economy seeing the biggest drop in GDP since the Great Depression of the 1930s, there would be a lot of companies going out of business. That is especially true when J Crew and JC Pennys both filed for bankruptcy recently. But the pandemic has yet to push a lot of companies over the edge. The stimulus PPP and big company borrowing seem to have kept a number of companies alive. Bankruptcy filings in April 2020 were 46% lower than in April 2019. There was an increase in the Chapter 11 filings, but those are companies that hope to reorganize and emerge from bankruptcy.
So far, 36.5 million people have filed for unemployment benefits. Stay-at-home orders and general fear about the coronavirus has kept demand for many products down. The consumer price index was down the most it has been since the United States began tracking it in 1957. People are hoarding cash and not spending. Savings rates climbed to the highest level seen since Ronald Reagan was in the White House. People are paying down their credit card debt; it fell by more than it has in 30 years.
The stock market keeps advancing, almost as if the pandemic had never happened. The $2.7 trillion stimulus has kept the stock market afloat and maintained large portions of the economy.
But the cloud on the horizon is the end of stimulus. Unemployment benefits will begin to run out in July. Airline grants cover the airlines until around September, and other industries surviving on the stimulus will see those programs end during the summer and early fall months.
Relations between the United States and China seem to be fraying. That comes in addition to another problem China is facing: The Belt and Road initiative was built on the premise of China loaning out trillions of dollars to other countries for infrastructure. China was willing to help build roads, railroads, ports, airports, and power plants. The loans were backed by the governments.
I use the example of Hambantota in Sri Lanka. China, through a Chinese company, loaned the money and helped modernize and build out the port. When Sri Lanka defaulted on the debt, China repossessed the port and now anchors part of the Chinese navy there.
It seemed like China intended to turn many of these less-developed countries into vassal states. The pandemic has changed that. Many of those countries are close-to or already in default. They want Beijing to forgive or renegotiate the loans. Kyrgyzstan owes an amount equivalent to 40% of their GDP; Djibouti owes 80% of GDP; Ethiopia owes 20%. Pakistan, Malaysia, the Maldives, Myanmar, Sierra Leone, and Cuba all count themselves among the 126 nations to whom China has loaned money. Some were being loaned at high interest rates, and prior to the Pandemic, China was forcing countries to hand over projects or natural resources.,
China now faces heavy losses if they renegotiate or forgive the debt or significant loss of prestige and reputation if they do not. That adds a cloud to the worldwide picture and could impact not only China but those 126 countries to whom China has loaned money.
The companies that make up the S&P 500 derive over half their revenues from overseas. What happens in China and in those other 126 nations will have an impact on the earnings of large- and some medium- and small-sized United States companies. It is not a matter of moving those sales and jobs back to the United States. That may work for manufacturing but not for the service industries. It will not work for the restaurant chains with outlets in those countries. They depend on the local residents’ demand.
The there is a major push worldwide for a vaccine, but the reality is this: there is a lot of basic biology we do not know about the virus. It is different from anything we have ever seen. We do not know what antibodies will convey immunity, nor for how long, and at what level.
While I believe there will be one or more vaccines, it is possible there will never be a vaccine for COVID-19. According to Angela Bitting: “One other thing that is very unknown right now, for any vaccine, is that we don’t know when antibodies convey immunity, nor for how long, and at what level…there is a lot of basic biology about this virus that is much different than anything we’ve ever seen.”
I do believe we will probably have one or more vaccines. But having one or more by the end of 2020 is very hopeful, and maybe not realistic. Until we have a vaccine, we will have to adjust to a completely different lifestyle than we had prior to the pandemic.
If the incidence of infections of COVID-19 continue to climb in the United States, it is unlikely the nation will easily go into a complete stay-at home again.
Worldwide, the stimulus packages are more than 50% greater than during the Great Recession and may be twice the stimulus of the Great Recession. However, the stimulus packages are temporary band aids. They do not create demand and they do not incent businesses in the longer-run. Businesses must reopen, but for that to happen, people will have to feel safe.
The initial response to the pandemic with worldwide stimulus has kept the stock markets alive and going, but we are entering a time when alertness to change is going to be important, maybe even critical, to maintaining portfolio values. That does not mean day trading or moving in and out of stocks. In my opinion, it means constant and vigilant oversight of the companies in which we own stocks. It means understanding changes in the economy not only in the United States but worldwide as well.
I know many investors have their computer-formulated financial plans. Sadly, I don’t believe the algorithms for the financial planning take into account black swan events like the pandemic. “The best-laid plans of mice and men often go awry,” wrote Robert Burns.
With dark clouds on the horizon, it is best to be prepared for rain, even a storm. That is what I believe I do for my clients. Are you prepared?
 “Total April Bankruptcy Filings Fall 46 Percent over Last Year, Commercial Chapter 11s Increase 26 Percent,” American Bankruptcy Institute (May 5, 2020), https://www.abi.org/newsroom/press-releases/total-april-bankruptcy-filings-fall-46-percent-over-last-year-commercial.
 “China Lent Billions to Poor Countries. They Can’t Pay It Back.” The New York Times (May 18, 2020), Print.
 Zhou, Laura, “Why China’s belt and road loans may not be the death trap other countries fear,” South China Morning Post (April 30, 2019), https://www.scmp.com/news/china/diplomacy/article/3008326/why-chinas-belt-and-road-loans-may-not-be-debt-trap-other.
 Bitting, Angela, Private Corporate Communications (May 19, 2020).
 Burns, Robert, “To a Mouse,” 1785.