Airplane Market

It is Summer in the northern hemisphere. Under normal circumstances, people would be hitting the road or catching a plane for vacation. It will be less so this Summer. 2020 is not normal. The northern hemisphere accounts for 50% of the Earth’s surface, but is home to 98% of the world’s investable assets. This statistic is probably shocking to you at first, but when you stop and think about this, it makes sense.

Over the past 3 decades, the average 2-month return for an index of global bonds is an increase of 1%. Perhaps surprisingly, that is the same as it has been for stocks. However, the average performance across July and August is 1.7% for bonds and a 0.2% decline for stocks. Seasonality plays a role. Summer generally brings increased volatility to the Stock Market. 2020 has been volatile from the get-go.

You might have heard that the Stock Market has been in rally mode since April and Technology stocks have been leading the charge, flying high. I write this today with quite a bit of sarcasm because I know you know. What was interesting today was the fact that Tech lagged, giving way to Financials and other value-oriented stocks to lead us into the weekend. That was a theme for a period back in May. It didn’t last long then. It will be interesting to see if it lasts longer this time. We could find out soon as Financials kick off Earnings Season next week.

Corporate America is about to announce their report cards for the April-June Qtr. This will measure the period that experienced the greatest economic damage from this coronavirus crisis. Expectations are very low. The results are going to be bad. Really bad. The Market has already priced in the bad. It’s in the rearview. What companies report will matter far less compared to what they see ahead. Most companies have already eliminated the formal outlooks for 2020. Visibility remains quite murky. But the Market will be hyper-focused on any signs of activity. Things had improved quite a bit in May and early June. That trend has reversed in July.

It still defies logic as to why stocks keep staying so elevated while the issues on health, economics, politics and geopolitics keep getting worse. About a third of the US skipped making full rent or mortgage payments so far this month. That is an incredible number and not positive for the American Economy. The US set another daily record for new coronavirus cases on this week and reports continued to highlight an uptick in hospitalizations and uncertainty over school reopenings.

There’s been volatile price action with investors crowding into Large Cap Tech for months. It expanded overseas. The Chinese Stock Market rallied like it has not since its own bubble formation a few years ago. The Chinese government had strongly encouraged the people to buy stocks to get the economic engine running. It worked. Chinese stocks were up 10% this week.

While the Stock Market has maintained its optimism, the Bond Market has not. Treasury yields are back down near the all-time lows. It signals caution. Bonds always tell the truth. You just have to learn to listen… The Fed is certainly playing a role in keeping rates low. There seems to be tremendous confidence that the Fed has the Market’s back, no matter what. That said, the Fed’s balance sheet shrank for the fourth straight week, falling below $7 Trillion on lower use of emergency facilities.

Disney World re-opens this weekend. This is perhaps the ultimate test for America. Florida has become a virus epicenter. Some people are thinking, “Yes! I can’t wait or I wish I was there already!” Alternatively, others are thinking, “How could they do this? Who would want to go?” That sort of summarizes American sentiment today. The Airplane is an important indicator. Orlando tends to have more visitors that fly in and stay at hotels compared to Anaheim, which has more driving day trips. This creates a bit of a bubble effect in Orlando. That’s a spin I heard today, suggesting Disney World is safer right now. We shall soon find out.

This has become an Airplane Market. You want to be on the plane, but you want to make sure you’re near the exit.

Have a nice weekend. We’ll be back, dark and early on Monday.


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