Recovery & Alphabet Soup

2020 has been a year like no other. We are only one-third in. For we investors, it’s felt like an eternity. At least that’s the way it’s felt at my house.

It’s a new month, but the same volatile price action. The Stock Market started the new month lower. April was the strongest month for stocks since 1987. That followed the March crash. A 30% rally was the response to the 35% decline. These are generational type moves in such narrow timeframes. After the massive run, everyone seems to be calling for sell in May and go away. We have clearly thought this Market was way, way overbought near-term. That came after being way, way oversold. We expect the volatile price action to continue.

The US Economy shrunk by nearly 5% in Q1. After an 11-year run, the longest economic expansion in American history is officially over. This was the largest contraction in over a decade. Q2 will be worse. The greatest damage from the economic shock took place in April and is spilling into May. Businesses were shut down as states kept people home.

What we’ve seen during this challenging period is American Consumer resolve. They have been nimble in their approach. Gardens around the country seem to be getting much more attention. Home Depot traffic supports this theme. Dog walking became a growth industry. Even the dogs are feeling fatigue. Caffeine fixes and splurges on sweets are still happening. The long lines and increased revenue at the Starbucks’ drive-thru prove that. Grocery stores, pharmacies and swelling online shopping picked up the slack from restaurant and bar shutdowns this Spring. It’s just not the same.

Ultimately, the country will re-open. It’s already started. Simon Property, which is the largest mall operator in the country, is opening 49 locations this weekend. Are people going to show up? The malls are expected to offer wipes and temperature checks while employees constantly disinfect common areas like escalators and doorknobs. It’s hard to see people rushing back to public places and open their wallets right now. We will certainly be tracking this activity from a distance.

Recovery will take time. Balancing the health crisis with the economic crisis is very tricky. It’s a tightrope, between killing the virus without killing the Economy. We have embraced Dr. Fauci’s words that the virus dictates the time. Time it will take. Fortunately, the shelter-in-place seems to be working. It got extended in California and New York. People are getting anxious. Summer continues to be the target for slowly opening things back up. The risk is reportedly big for a second wave in the Fall, never mind a premature re-opening. The FDA just approved Gilead’s Remdesevir for emergency use against the virus. That’s something.

Recovery has become an alphabet soup of expectations. There have been predictions of V-shaped recovery, which would be quick, suggesting it’s already happening. There are others calling for a U, which would take a few months to bottom out before recovering. There’s also a W-shaped recovery which would see a quick bottom, followed by quick recovery and then another fall back before a sustainable year-end recovery. The worst would be an L-shape, which would result in a long period of economic sluggishness. I promise I won’t go into the square-root or Nike swoosh shaped recovery theories.

We have been prepared for a longish U-shaped recovery for the US Economy and a W-shaped recovery for Stock Market. So far, it seems to be playing out that way. The oversold rally reversed hard on Thursday, and the setup for a healthy back-and-fill in May is there. That would create another buying opportunity at lower levels for another rally from Summer into Fall.

It’s May 1st. Rent is due today. This is likely the beginning of many conflicts from coast to coast between renters and landlords. It’s happening at office buildings as well as at home. Over 1/3 of American households are rentals. It’s much bigger in cities. Over 60% of those that call New York, Los Angeles and San Francisco home are renters. It’s a really bad situation with no winners.

We still find ourselves in the roughest patch of this economic shock. Some regions are in better shape than others. There is increasing light on the other side, we can see it. But time is required. Patience is being tested. It still seems too early. There’s certainly no all-clear sign. Besides, the Bond Market is sending no signal that things are sustainably improving yet. The Bond Market rarely lies. We remain defensively positioned and are proceeding with caution.

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


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