The recent surge of COVID-19 cases in states like California, Florida and Texas may have some people wondering if the current economic expansion is sustainable, or if the economy and the stock market are headed for another correction. We believe the expansion will continue – perhaps with a few rough spots, but continue, nonetheless.
Fortunately for us, America is a big place, both geographically and economically. States with the highest recent surge in daily coronavirus cases generally follow the southern coastline/border. Additionally, a larger portion of the population is beginning to conform to the social distancing requirements (including wearing a mask) necessary to bring cases in the entire U.S. down to a manageable level, thus enabling economic growth to continue. Despite the closure of some small businesses and larger retailers, total retail sales – excluding autos and gasoline – are nearly back to pre-COVID levels. Employment in e-commerce retail, including order fulfillment and delivery, is surging.
Some companies benefiting from "new normal"
As more people stayed at home, companies like ZOOM saw usage increase by almost 3,000% in the first four months of this year to 300 million daily meeting participants. Microsoft reported this month that its Teams software platform had reached 13 million daily active users. Domino’s Pizza said, “the coronavirus pandemic gives it a unique chance to tighten up its delivery network by adding more stores to U.S. towns and cities, as business closures free up real estate and lower rents.” In economics, we call this “creative destruction” as new businesses replace old businesses. As demand for home delivery increases, the food industry has been quick to adjust. Everywhere we look we see consumers and businesses adapting to the new reality.
Record low interest rates have created a surge in mortgage applications and the housing market is making a comeback. Additionally, the pandemic has illustrated just how vulnerable the U.S. supply chain is to sudden disruption. Deglobalization and onshoring will create new jobs in construction, manufacturing, robotics and technology, and we can expect a surge of new factories in the relatively low-cost Midwest.
Resiliency of the U.S. economy
Finally, we believe in the resiliency of the U.S. economy and its ability to continuously adapt to change. This is one reason the stock market has held up so well. The price of stocks is partially based on the most recently reported earnings, and a portion of their value is based on future expected earnings. Current valuations look high because recent earnings have generally been poor, and the market is placing more emphasis on future earnings. Much of that belief in future earnings comes from the massive amount of monetary and fiscal stimulus that has been applied as a salve to our wounded economy. As the economy heals, the stimulus will be withdrawn, and stock market valuations will recover their emphasis on near-term profitability.
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