Is the market ignoring all of the warning signs?

5/15/20

As the country stays mostly under strict stay at home orders due to COVID-19 and states begin to evaluate a return to “normalcy” there are staggering numbers in the wake. The COVID-19 pandemic has caused an incredible shift in the daily lives of households, their income, sense of security and as a result how and where they spend. As we await the retail sales numbers for April and look at the -17.22% YTD return on the Dow we have to wonder if the markets are fairly pricing in all that’s been going on?

Retail Sales Plunge

The most recent Bloomberg Economic survey expects headline retail sales to have dropped another 11.9% in April, adding to the 8.4% decline in March. Core sales in the same survey (less Auto and gas components) likely plummeted another 7.6% following a decrease of 2.8% in March. An important note is the Core sales projection does not include the deeply impacted Auto industry during these times. Signs of this loss of traction¬† show in bankruptcy claims from the likes of: Lord & Taylor, SFP (parent company of Papyrus), Modell’s Sporting Goods, Pier 1 Imports, and True Religion to name a few.

The numbers released today showed a 16.4% drop in retail sales.

Unemployment Skyrockets

Weekly claims totaled nearly 3 Million last week, bringing the COVID-19 count up to 36.5 Million jobless claims. The staggering numbers still have a lag as the rush to claim traditional unemployment and PUA (Pandemic Unemployment Assistance) has left most states systems overwhelmed and understaffed to keep up. As a result, money has not made its way into the hands of many who have been in need and/or making efforts to claim benefits.

Housing Rents/Mortgages lay waiting

Although the CARES act provided some protections in the forms of forbearance and moratoriums on eviction/foreclosure payments will be coming due soon. For renters who still wait for unemployment that may mean the $1,200 has been all that they have received during this time. The same can be applied to homeowners in the same situation, having to stretch the funds across the needs of several months. The issue is that rents will become due,lenders may ask for the lump sum of forbearance payments (e.g. 3 months all at once) unless a modification can be accommodated. The expectation that 3 months of mortgage money would appear during a hardship is not likely, nor has the stay at home relaxed enough to open up many new jobs or returns to previous jobs. As a result, the CARES Act allows for up to 12 months of forbearance, allowing to continually “kick the can” down the road and balloon the debt potentially. There have been talks and proposals of legislation that would require the ability to defer the payments to the end of the loan, potentially easing that looming debt and softening the hammer that otherwise may await the housing market.

Individuals & Small Businesses Lack Funds

As previously mentioned, there are many households still struggling to resolve unemployment issues. From capacity for traditional UI filing to notifications of “needing to speak with a representative” with phone lines constantly jammed it has left many feeling hopeless. Furthermore, the PUA lagged in being setup where hard-hit states such as NJ did not see PUA ready to start paying until almost two weeks ago. This comes on the heels of the SBA’s PPP program that had major issues of going to “not so small” companies with a second round of funding needing to be added.

Finally, returns to employment will not be normal for some time. As we look at capacity issues (e.g. proposed 25% of normal capacity to allow appropriate distancing) there will be less revenue and less staff necessary to run the business. Furthermore, to retrofit certain workspaces with the revenue hits can be a daunting task as well.

Our focus would be an overweight to utility, healthcare and consumer staples positions for the future. There are areas of tech that are certainly benefiting as of the time but a trail off needs to be accounted for if previously “normal” conditions resume and services are paired back or cancelled.

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