Welcome to the May 2020 Newsletter. This month, we’re covering more details on the coronavirus (COVID-19), its effect on the economy, and our need to fight this pandemic together. Please read on for more information.
We have continued with a modified format of our newsletter as COVID-19 has taken control of our economy.
COVID-19 continues to spread throughout the U.S. even as many citizens have begun to call for more openness. No vaccine has yet been developed, although more than 100 antiviral drugs are being tested around the world. But a treatment plan might be on the horizon.
Remdesivir, an antiviral drug that never previously worked out, was used in a trial of 1,000 hospitalized patients with COVID-19 by the National Institute of Allergies and Infectious Diseases (NIAID). They found those receiving the drug recovered faster (11 days) than those who received a placebo (15 days).
As judged by stock market internals, an outright buying opportunity has not yet developed. We remain vigilant to see if one develops in the weeks and months ahead.
But employees should continue to buy low and make their weekly, biweekly, or monthly contributions to their employer’s retirement plan or IRA. At this time, additional money can be added to an investor’s stock market allocation, but only on a dollar-cost-average basis.
U.S. nonfarm payrolls declined in March by 701,000. The February payroll number was revised up to 275,000 from 273,000. The January payroll number was revised down to 214,000 from 273,000. The rolling three-month payroll average decreased to -71,000 this month from +243,000 last month. Without a doubt, COVID-19 is a piledriver pounding the U.S. economy into the ashes.
We seldom report the weekly unemployment claims numbers in this newsletter, but the most recent data is shattering.
Over 30 million people have now filed for unemployment benefits just in the past 6 weeks. This is unprecedented, with many people beginning to challenge the strategy of a national lockdown. Many state’s computer systems are swamped with the high number of claims being filed.
The Bureau of Economic Analysis said the first estimate of the 2020 first-quarter GDP was -4.8%. After 126 months, the longest economic expansion in the U.S. has now come to an end. The previous longest expansion was 120 months from March 1991 to March 2001. Current expectations for the second-quarter 2020 GDP vary from -30% to -40%.
Annual inflation dropped in March to 1.3% from February’s adjusted 1.8% as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, which excludes food and energy, dropped to 1.7% from January’s adjusted 1.8%.
Long-term inflation expectations can be determined by calculating the differences between Treasury bond yields & TIPS real yields of the same maturities. Results are:
|Bond Maturities||Annual Inflation Expectations|
Inflation numbers above are 0.2% higher (on average) than last month’s numbers. Higher long-term inflation expectations this month are a good thing as we must avoid our worst potential economic enemy: deflation.
Obviously, there is an unemployment crisis causing a painful lack of family income all across the country. We also have had 65,000 deaths nationwide due to COVID-19. We have focused on a variety of medical, economic, and political topics we think are most important.
For those who have not sold or sold little, it’s too late to sell anymore. Hold onto what you have.
For those with cash, the bond market is even more treacherous than the stock market. So, for now, keep your non-stock market money in cash.
We cannot predict the stock market going forward until this vicious, highly contagious virus is brought under control. We recommend extreme patience as this tragedy continues to develop.
There is perhaps no better way to show the magnitude of the virus in the U.S. other than the four charts below.
On April 29, 2020, the National Institute of Allergies and Infectious Diseases (NIAID) announced the results of the first clinical trial launched in the U.S. to evaluate an experimental drug, Remdesivir, for the treatment of COVID-19. The trial of 1,063 hospital patients with the virus began on February 21. Preliminary results show the median recovery time was 11 days for patients treated with Remdesivir compared with 15 days for those who received a placebo. Results also suggest an improved survival benefit.
The next steps include more clinical trials using Remdesivir with other antivirals to find the best combination to decrease hospitalization time and significantly lower the fatality rate.
Several efforts are underway aimed at developing a vaccine for COVID-19. The University of Pittsburgh School of Medicine, where Jonas Salk developed the polio vaccine in the 1950s, is working a vaccine candidate and has applied for an investigational new drug approval from the FDA in anticipation of a Phase I clinical trial. Other vaccine development efforts include those of Moderna, Johnson & Johnson, and Pfizer.
When it becomes available, we will all need to be vaccinated against the virus. Assuming a vaccine is available in large quantities by early 2021, everyone entering a school or university in August 2021 will likely need to prove they have received the vaccine to begin classes.
I’ve had the pleasure of meeting a variety of Chinese workers and professionals while I was still working for Caterpillar. I’m convinced they are honest, hard-working people who (like all of us) just want a better life for themselves and their children. But the same level of ethical behavior can not be said about the Chinese government and some Chinese corporations. For example:
On December 30, 2019, Dr. Li Wenliang in Wuhan aired his concerns on social media, “warning the public of a possible new SARS-like virus spreading in Wuhan, China.” Within days, the Wuhan police detained him and made him sign a statement that his online posting constituted “illegal behavior.” Dr. Li later died of the virus.
The Chinese government knew on January 14, 2020 they had a pandemic on their hands in Wuhan but made no public announcement until President Xi did so on January 20, 2020.
The SARS virus appeared in late 2002 in Guangdong province in southern China. In 2005, the Chinese government blocked all domestic media reports of a massive chemical spill of benzene in the Songhua River until wild rumors about the disaster prompted disclosure of what had happened.
During the 2008 Beijing Olympics, local media was stifled regarding revelations that at least 20 dairy farms were spiking milk products with the chemical melamine. One father of a deceased child was imprisoned for over two years for “provoking disorder” for drawing attention to the government’s failure to assist those who became ill.
In 2011, Chinese authorities literally buried the evidence of a horrific high-speed-rail crash that killed 38 people and injured dozens more by dispatching earth-moving equipment to entomb the wrecked train at the crash scene.
A medical scandal in July 2018 linked to substandard vaccines distributed to thousands of infants was one of the most heavily censored stories in China that year. Six children died and 300,000 became ill.
Some Chinese corporations are no better. Luckin Coffee, a Chinese company, had its stock halted for trading on April 7, 2020 after the company announced on April 2 that it would conduct an internal investigation into fraud allegations concerning large fabricated transactions. Luckin share prices dropped by 80%.
There are just too many examples of lying and deceit within the Chinese government and now Luckin Coffee. Our conclusion is a new “manufacturing war” is underway with China. Their objective is nothing less than total world domination.
I strongly recommend that, when at all possible, you don’t buy Chinese products or stocks or bonds in Chinese companies. The ethics of the Chinese government and some Chinese companies are just too flawed and scarce. They continue to prove to the world they are the greatest enemy to freedom and independence from their totalitarian and evil government.
In late April, the Federal Open Market Committee (FOMC) said in their statement, “The Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning.” Never before has the Fed ever used the phrase “in the amounts needed.”
The Congressional Budget Office predicts the 2020 Federal Budget will have a $3.7 trillion deficit, and the 2021 budget will have a $2.1 trillion deficit.
In 2020, people with tax-deferred retirement accounts (401k, 403b, 457, IRAs, etc.) who are usually subject to required mandatory distributions, or RMDs, can refrain from taking an RMD for fiscal year 2020. For those born before July 1, 1949, RMDs are required starting at age 70 ½. But for those born after June 30, 1949, RMDs are required starting at age 72. No RMD in 2020 also applies to the beneficiaries who have an inherited tax deferred account.
Given the health-related nature of this year’s stock market decline, it remains to be seen whether an interim buy signal will develop during a period of stock market consolidation. The wildcard in the outlook is the question of whether the virus will return for a second round of chaos later this year, as occurred in the 1918 pandemic.
If it does not return, there is no need for the S&P 500 Index to revisit its falling-knife closing low of March 23. On the other hand, a second wave of COVID-19 in the absence of a vaccine would increase the risk of stock prices trading at a lower level than would otherwise be necessary. We will closely monitor market activity for indications that market internals are sufficiently favorable to support an interim buy signal.
We expect investors to focus corporate valuations efforts on 2021, with the understanding that 2020 corporate earnings will be severely impaired by the pandemic.
Everyone needs two plans: one if the stock market goes back down and maybe retests the March lows, and another plan if the market continues to drift up.
We believe the first plan is more likely: the market will go down from its current level before heading back up. Therefore:
Here is sound advice no matter which path the stock market takes in the short term:
We cannot fully describe the dedication and sacrifice endured by nurses, doctors, and first responders during this crisis. But Winston Churchill once described the sacrifice of the RAF fighter pilots who defended London against the German Luftwaffe bombers in WWII. Churchill said, “Never was so much owed by so many to so few!” With regard to those putting their lives on the line, we could not agree more.
Take care of yourself and your loved ones.
-Mark Lorenz, Lorenz Financial
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.