Pour you a cup and say, "Hello, how ya been?"
Looking around, seeing the same things
It's comforting how some things never change
Never change, never change, do they?
Sara Bareilles – “Opening Up”, from the Broadway musical “Waitresses”
The outlook as we re-open
The Council of State Governments has an excellent website with links to the re-opening plans for all 50 states. With each state re-opening at its own pace, the recovery is bound to be slower and more uneven than we might have wished for, but we are in recovery mode to be sure. COVID cases in the U.S. are declining, but just barely. One month ago the U.S. was averaging 23,524 new cases per day. Currently the average is 23,265 cases per day. While New Jersey and New York are both below 1,000 cases per day, California has taken over the number 3 spot from Illinois with over 3,400 cases per day and climbing. This is a healthcare crisis, and we still do not have a healthcare solution. There are many promising solutions, but until we get one into production, COVID will continue to disrupt our economy.
Requests for driving and walking directions have returned to pre-pandemic levels according to data from Apple Mobility Trends. However, route information searches for public transportation like buses and subways are still 50% below the January/February 2020 averages. The key to successfully opening up cities like New York and Boston will be figuring out how to safely use public transportation.
Retail sales for May were up a record 17.7% indicating that consumers were eager to return to old habits after some of the restrictions were lifted. This reinforces our view that consumer confidence in the economic recovery remains elevated. Much like the upside surprise in the May jobs data and strong vehicle sales, the faster rebound in consumer spending indicates that perhaps the contraction in second quarter GDP will not be as severe as originally estimated. Online retailers and grocery stores have shown consistent double digit growth rates over the past three months as other retail has been required to either close altogether or curtail volume. Although these numbers represent a rebound from a very low base, clothing sales were up 188% in May, furniture sales were up almost 90% and sales of sporting goods jumped 88%.
That didn’t stop The National Bureau of Economic Research from declaring that the U.S. had officially entered into a recession as of the first quarter of 2020. To be fair, it is obvious that economic activity peaked in February, just before we shut down the economy. It is also likely that the decline in second quarter GDP will be more severe than the decline in first quarter GDP. The NBER also pointed out that although duration is an important component of a recession, the depth of the contraction is also important to consider as well as the breadth of the contraction across the economy. Assuming national economic output turns positive in the second half of the year, 2020 may hold the record for both the shortest recession as well as the most severe.It's hard to beat the system
When we're standing at a distance.
So we keep waiting (waiting)
Waiting on the world to change.
John Mayer – “Waiting on the World to Change”
Our research, much of it from Don Molé our Senior Economist, suggests several key investment themes as we move forward in a “socially-distanced recovery.”
- Stay with Quality. We are focused on companies with good profitability now, in this environment. This is no time for start-ups with great ideas but no earnings.
- Growth is good. Focus on companies that are growing sales right now, not companies with future growth potential.
- Domestic companies. Current and emerging trends like de-globalization, onshoring and increasing tension with China, along with varying degrees of COVID infection rates in other countries favor companies with a higher percentage of U.S. sales.
Some longer-term themes we're exploring
Work From Home – A new permanent reality for millions of workers. Expect an oversupply of commercial office space and a redesign of existing offices to accommodate workers who only come in part-time or on-demand. The National Association of Home Builders is hosting a free webinar on June 25th entitled ‘Remodeling Economic Outlook: Housing Changes After COVID-19’ specifically dealing with the aftermath of COVID-19 and the new WFH trends.
Technology and Healthcare – Look for trends in telemedicine combined with diagnostic robotic tools to enable patients to interact with their healthcare provider from a distance. Other beneficiaries of this trend will include older adults who are staying home and younger workers more open to newer experiences. Onshoring the supply chain from China to the U.S. will require a large investment in technology, specifically artificial intelligence and robotics. We should not expect to relocate all of that production to the U.S. with the same workers we had before the pandemic. In February, there were 1 million more job openings (6.2 million) than there were total persons unemployed (5.2 million). Even with the high current unemployment, most of those workers are neither trained, nor located where the new manufacturing jobs will be. It will take fewer and more highly skilled workers, partnered with advanced technology, to run the next generation of manufacturing facilities.
Big Data and Big Government – Having data is the key to understanding this most recent pandemic, evaluating our responses and making decisions about the way forward. The new reality is that citizens will have to make a choice about trading some privacy for safety. Having your temperature monitored from a distance if you are in a public gathering for example, or tracing who you may have been in contact with to isolate infections could be new norms.
Finally, our investment thesis remains consistent. We believe the economy will continue to evaluate, respond and innovate around current and future challenges. We observe that the pace of change is accelerating because our collective knowledge is increasing at an increasing rate. Recent social upheaval, if it results in everyone being treated more fairly and being encouraged and allowed to maximize their true human potential, is a good thing. Our standard of living will most likely be higher in the future than compared to today thanks to advances in technology and medicine. Stocks, on a risk adjusted basis, will outperform bonds and cash over the long term and provide protection from inflation. Lastly, maintaining a disciplined asset allocation strategy and rebalancing portfolios periodically results in selling high and buying low.
More to come. . . .
Talk to a Wealth Management advisor
We know that managing money is about more than simply trading stocks and bonds. It's planning for life's milestones, and adjusting those plans when necessary. At Old National Wealth Management, we invest the time to understand your goals and the discipline to manage your assets accordingly.
Copyright © 2020 Old National Wealth Management - The material contained in this report may not be copied, reproduced, republished, posted, transmitted or otherwise distributed without prior written permission.
Investment instruments utilized by Old National Wealth Management are not FDIC insured, are not deposits or other obligations of Old National Wealth Management, Old National Bank, its parent company or affiliates, and involve investment risk including the possible loss of principal invested.
Investment and securities information presented herein is unique to Old National Wealth Management's approach to investment management. All information and opinions have been obtained from sources believed to be reliable and current at the time of publication, but are not guaranteed and do not claim to be a complete statement of all material factors. Examples or other representations made herein are for illustrative purposes and are not intended to be specific legal, tax, or investment advice and do not represent a solicitation.
Investments and strategies that may be presented may not be suitable for all investors. Old National Wealth Management Client Advisors and Portfolio Managers will work with interested parties to execute plans developed in consultation with their attorney or tax advisor.
The comments, views and opinions expressed herein are those of the author and Old National Wealth Management. From time-to-time, Old National Bancorp affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Old National Bancorp and its affiliates do not accept any liability for any direct, indirect or consequential damages or losses arising from any use of this report or its contents.