An Uncertain Journey
“Work as if you live in the early days of a better world” 1
Investors were reminded this week that the optimistic narrative of resuming economic activity faces the realities of a still rampant virus, and many complications caused by social distancing. Dr. Anthony Fauci and Fed Chairman Jerome Powell both offered sobering comments about the long road ahead for public health and fiscal stimulus. Economic reports released today that further quantified the April declines in industrial production (-11.2%) and retail sales (-16.4%) combined with their comments to push equity markets down slightly, and rain on the re-opening parade.
The path forward for economic activity is fraught with uncertainty, and the consensus is that the destination will retain many aspects of COVID-created adaptation. In the mid-19th century, half a million Americans embarked on another journey that re-shaped our social and economic landscape – the westward migration along the Oregon Trail. The reasons for undertaking that harrowing journey included economic doldrums following the depression of 1837, and the continuous struggle with malaria in the otherwise fertile bottomlands of the southeast.2 The mixture of hope, fear, and uncertainty provide a poignant parallel to our lives today
The Oregon Trail expanded the American presence from the well-established eastern states to the developing open landscape of the West. The nature of the current pandemic has forced adaptation by businesses and individuals to migrate also – in this case, more fully into the digital landscape. We are ordering groceries and supplies online, leaping fully into telecommuting and telemedicine, signing legal agreements electronically, and further embracing digital entertainment options. Just as the East did not disappear once the West was opened, the brick and mortar economy will adjust and co-exist with digital options as they are expanded, and create new frontiers for innovation and imagination.
Certain businesses, like Amazon and Netflix, had already established themselves in this digital landscape. Their path has been easier in many ways than that of traditional businesses, but simplistic measures of revenue increase aren’t the whole story. The pandemic environment has also meant increased operating costs: Amazon’s earnings were down in the first quarter despite a 26% increase in revenues, and they expect to lose money in the second quarter ending June 30th. Netflix also looks fabulously successful on the surface, adding 16 million subscribers in the first quarter as people consume more content while confined at home. Beneath the surface, though, Netflix has been accelerating spending over recent years to increase its content generation, and faces tough competition from Disney, Apple, and HBO Max. Their per-subscriber costs have been going up, not down.
The innovation at more traditional businesses has been really dramatic, with significant adaptation of existing digital programs. General Motors CEO Mary Barra recently touted the expansion of their “Shop-Click-Drive” tool that is allowing more than 85% of the GM dealer network to complete car purchase transactions online and offer touchless home delivery.3 Real estate tours are now offered via video chat, and higher-end listings come with pre-produced videos introducing buyer not only to a house but a neighborhood. Changing buyer expectations about such significant purchases could become permanent elements of a more convenient transaction.
Provisioning for the Journey
This migration of our economy further into the digital landscape requires capital to sustain workforces, and adjust facilities, workflows, and business software. The Fed and Congress are charged with provisioning US businesses and households for this journey, a task made more difficult by the speed and breadth with which the crisis arrived. State unemployment systems are still working through backlogged requests, and loan issuance for the Payroll Protection Program forced community banks to expand the scale of their lending virtually overnight.
Rather than oxen, flour, and wagons, the current crisis requires supplies of emergency payroll loans, credit market liquidity, and direct stimulus checks to US households. One provision already being used is the Fed’s move to near-zero interest rates, which has helped consumers refinance mortgages and student loans at record levels over the past month4. These refinances are a form of personal stimulus, with lower debt payments providing cash flow relief that will persist beyond the current crisis.
The initial rounds of stimulus were swift and important, but more is needed. Despite pressure from the White House and expectations of investors, the Fed has been resolute that it is not considering negative interest rates. Instead, Jerome Powell put the onus on Congress when he stated that “additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.” This puts the ball in Congress’s court, and requires reaching bold agreement; a tall ask in our highly partisan environment.
The process began this week when House Democrats introduced the Health and Economic Recovery Omnibus Emergency Solutions Act, or HEROES Act, which outlines $3 trillion of coronavirus relief, including a second round of stimulus payments of up to $1,200 per person. Senate Republicans have already called it ‘dead on arrival’ and espoused a slower June timeline for negotiating the relief bill. Part of the market sell-off this week was re-evaluating the timing and scope of this next stimulus package. Wagon trains without sufficient provisions risked getting stuck or seeing members of their party not survive the journey; the same is true in the current moment, particularly if the stimulus provided isn’t up to the task of opening a new frontier.
Are We There Yet?
Managing expectations is a critical element of a long journey, and we imagine Dr. Fauci may see investors as the child in the back of the wagon asking “are we there yet?” every few days. What’s next remains abundantly unclear. Cities, counties, states are re-opening slowly, and practicing new ways of resuming core economic activities. The impact on our client portfolios is a little like the lurch and rattle of wagon wheels, giving a rough and uneven ride. We look to the destination, beyond 2020, for more stability in both markets and in portfolios beyond this current leg in the journey. Portfolio liquidity and bond allocations serve as provisions for our clients’ nearer-term needs, and the diversified stock allocations will provide the growth that is needed for the twists and turns certain to come ahead, whether personal or global.
The efforts of those who pushed westward helped create a better world for all citizens, even those who resisted the change. Our current leap forward into digital innovation and integration will likely be similar. The journey will not be easy, but it will yield new opportunities for good work, and a new landscape for our future.
1Inscription on the Scottish parliament building opened in 2004, originated by Alasdair Gray. Gray passed away in December, 2019, and was eulogized by The Guardian as “the father figure of the renaissance in Scottish literature and art.” He often used this phrase, including a variation with ‘nation’ rather than ‘world” in his books.
2 Early emigrants had little hard knowledge about their destination in the American west, but “They did know that the backcountry of Iowa, Missouri and Arkansas had not proved to be a shining paradise…ignorance allowed travelers to advance where fuller knowledge might have rooted them with apprehension.” See Oregon Trail—Facts, information and articles about the Westward Expansion at Historynet.com.
4 “The refinance index was 210 percent higher than it was the same time last year, and the refinance share of mortgage activity accounted for 70 percent of applications.” May 7th, 2020. See Washington Post
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