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Sound Advice: June 3, 2020

Economists

 “The First Law of Economists:  For every economist, there exists an equal and opposite economist. The Second Law of Economists: They're both wrong.”
Only a few short months ago, during an online seminar for financial professionals, Joe Davis, Vanguard’s Chief Global Economist and head of Vanguard’s Global Investment Strategy Group, said there would be no recession in 2020.  
Back in January, Jeremy Siegel, the well-known finance professor from the University of Pennsylvania’s Wharton School, waxed enthusiastic about valuations of stocks in the 20 times earnings range and he looked for even more annual gains ahead.
They were both wrong.
Approaching midyear, we are in a marked recession that is not going away anytime soon, despite the hefty, albeit temporary, rebound in market averages in April and May.  Five weeks or so from now, earnings reports for the second calendar quarter will start to be released.  The comparisons will be dreadful.  
Despite relaxation of social distancing rules in some parts of the country, there is every reason to expect more bad news from Corporate America for at least the remainder of this year . . . and possibly beyond.
The damage will not be universal.  Due to extended periods of social isolation, digital communication and the technology that supports it will prosper.  Brick-and-mortar retail stores will be hammered, but e-commerce sales will continue to soar, as they have already.  Wherever there is demand for interaction, whether social or commercial, the cyber world will benefit.
What will separate the fortunate businesses from those that are struggling will be the degree of risk associated with each and the prospect of an imminent treatment and/or vaccine.  No doubt there will be one, but the question is when.  My guess is that it will be early-to-mid 2021, but even that is based on an acceleration of medical research and testing requiring considerable optimism.
Our economic rebound will begin when people regain the confidence needed to resume activities that had been the mainstays of their lives.  It is not confidence that prompts us now to go to supermarkets, pharmacies, and gas stations.  It is basic need for which there are few, if any, options.
In some parts of the country, restaurants are opening (with sharply defined spacing between tables) and public areas are beckoning as warm weather returns.  This is good news and bad news.  The risk of infection is as high as ever and the reality is that nothing has changed other than the season.
As colder weather sets in this coming fall, the situation will not be much different from what we have just gone through.  The current period of opening up may well lead to an accelerated rate of new infection by autumn along with no near-term progress on treatments.
Unfortunately, the latest news is that the mid-May announcement by Moderna of early progress on initial testing of a new vaccine, which was accompanied by a major offering of Moderna stock, is now under investigation by federal securities regulators.
Let’s not forget the huge number of unemployed people, over 40 million as of last week.  Although the majority of them expect that their layoffs will be temporary, we have seen estimates that suggest 40% will be permanently out of work.  When you read the news about nationwide rioting, keep in mind the probability that this undercurrent is a driving force behind unrest and will continue into the future.

N. Russell Wayne, CFP®
nrwayne@soundasset.com
www.soundasset.blogspot.com

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