I hope everyone is healthy and making the best of this summer in this tumultuous year. Today we got U.S. 2nd quarter GDP data, which was down by roughly a third, which is something we haven’t seen since the 1940’s. This is a lagging indicator and was expected as a result of the Covid-19 pandemic and associated lock-down. In Europe, they took a different approach where the government more aggressively subsidized businesses to keep people in jobs, so their GDP didn’t drop as far, and unemployment has held a bit more steady. Currently, Congress is debating the next (maybe last) stimulus bill, which is very important. Both sides realize we have to spend, but of course differ on how much and on what are the biggest priorities. My hope is that the sides can meet close to the middle and I’m optimistic that they will, given neither side wants to go into November elections having left its citizens empty-handed despite government-mandated lock-downs. While the past is the past, what is most important is the future. Below are some of the key things we will be watching:
1) Jobs growth is likely to be choppy as some states have increased restrictions once again. Getting the unemployment rate under 9-10% by year-end would be a good achievement, particularly if pandemic risks abate.
2) Enhanced unemployment benefits have been a major catalyst for the economy thus far, as about 2/3rds of people on unemployment actually made more than they did when they were working. This has helped consumer spending and while of course it can potentially disincentivize job-seeking, the balance must be carefully managed, as there simply aren’t enough available jobs for everyone at this point until the economy is more fully opened.
3) What is the course of the pandemic? There are some signs of optimism in the fact that cases and hospitalizations are declining in hard hit Arizona. There are also some green shoots in Texas, Florida, and California, but more is needed to confirm a drop. The death numbers are tragically terrible of course and are a lagging indicator. Hospitalizations and ICUs are probably the most important metrics in predicting future deaths. If current trends continue, deaths should peak in late August from this cycle. Keep in mind that once they peak, they tend to fall off fast as we’ve seen in the Northeast and Europe. The absolute peak in daily deaths occurred months ago, but obviously all of this is fluid. Be safe and we’ll keep watching.
4) The dollar has been dropping, which is actually good for our economy as our products are more competitive globally, but it also can potentially lead to inflation. There are definitely signs we will see inflation, as we see prices picking up on many goods and services, in addition to precious metals. Remember, inflation is very bad for bonds, annuities, and cash. It is much better to own stocks in such an environment, as they can benefit from the price increases, rather than simply have their value destroyed.
I’ve been reasonably pleased with earnings for our portfolio companies so far. Our stocks are trading at 2009 low-type valuations, so the upside potential is massive. We have tremendous unearned option premium, much of which we should hopefully realize by late January when most of the options expire, which could really help quite a bit. Volatility is still high and value stock prices are low leading to attractive investment opportunities. We are past the worst and while the year is sure to continue to be volatile, especially given a rancorous election cycle, we will persevere and push through. Wishing you all the best and we are here if you need anything at all!