The Great Reopening

June has arrived and people in Denver are getting ready for a week of 90-degree temperatures. The ongoing coronavirus pandemic has now claimed over 103,000 lives, but that has not stopped 38 states from reopening. Looking at the pictures of a pool party at the Lake of the Ozarks, it seems like people have forgotten that a pandemic ever existed. Was the stock market in the background doing a keg stand? It would not be surprising since we can all agree the stock market is not worried about COVID-19 as it has shot up over 36% from the lows on March 23rd.

The topic of reopening is a contentious one and will be a subject that is debated for the foreseeable future. Mohammed El-Erian, the chief economic adviser at Allianz, is already sparking the conversation in a Twitter post on May 24th. Are we reopening too soon? Or, did we overreact? Unfortunately, these are complicated questions and it will be a long time before we know the answers. On May 22nd, the Wall Street Journal released a great article on the history of pandemics. “The only precedent for its rapid spread to every continent, killing people everywhere and devastating both local economies and world trade, was the flu pandemic of 1918-19.” The article goes on to discuss a form of herd immunity or partial genetic resistance humans develop as they are exposed to these viruses from childhood. Over time, herd immunity has protected regions as invaders from other regions, without immunity or partial genetic resistance, may contract these viruses and fail to conquer the cities or regions. However, when these viruses are brought to new regions, the newly exposed population does not have any genetic resistance and these viruses can wipe out a population. A perfect example is when Europeans brought smallpox to the New World. When this occurs, the partial immunity of the invaders has assisted them with their invasion. It’s a great read and I would encourage you to take a look if you have a WSJ subscription.

Not covered in the article, is a question this article provokes. Could this genetic resistance or partial immunity be the reason the mortality rates with COVID-19 are much higher in Europe and North America? In Asia, the population was exposed to SARS in 2002. The genetic sequence of COVID-19 is ≥70% similar to that SARS (NCBI.gov). The Asian population’s early exposure to SARS in 2002, could have allowed them to develop herd immunity to the virus, which may explain why mortality rates in many countries in Asia are significantly lower than Spain, UK, Italy, and the U.S. (among others). In Taiwan, with a population of almost 24 million, there have been only 7 reported deaths from COVID-19!

Are You Numb to the Media?

It is only natural to become desensitized to the dire headlines we read on a day-to-day basis. It appears that most investors are not worried about the media, or the economy. While the Labor Department has found that a large majority of laid-off workers expect their joblessness to be temporary, there is growing concern among economists that many jobs will never come back. Nicholas Bloom, an economist at Stanford University, commented on the path to recovery, “I hate to say it, but this is going to take longer and look grimmer than we thought.” Mr. Bloom, is a co-author of an analysis of the coronavirus epidemic’s effects on the labor market, estimates that 42 percent of recent layoffs will result in permanent job loss. Since the beginning of the COVID-19 crisis, the U.S. economy has lost around 40 million jobs. Using Mr. Bloom’s estimates, around 16 million of those job losses may be permanent (assumes 40% of losses are permanent). Does that align with a stock market (using the S&P 500) that is only down around 10% from the recent highs? I don’t think so.

Stock market pundits often use market breadth to test the durability of any market rally. Market breadth is a measure of the percentage of stocks that are participating in the rally. Today, breadth is lousy. The Nasdaq Composite is the poster child for narrow market breadth. The 10 largest stocks in the Nasdaq have gained, in aggregate, almost $900 billion. The other 2,600 or so stocks have lost about $300 billion. A tiny sliver of names is driving all the gains (May 22, 2020).

Furthermore, it’s interesting to see the dichotomy between the economic outlook from U.S. consumers and the movement in the stock market. The University of Michigan’s consumer sentiment survey measures individual investor’s thoughts about the health of the economy. The spread between the monthly percentage change of the S&P 500 and the University of Michigan’s consumer sentiment survey climbed to 32 percentage points last month, the widest-ever gulf in data going back to 1978 (Dow Jones). It is interesting that the individual investor is pessimistic about the future direction of the US economy, yet the stock market continues to rise.

Will the stock market rally continue? It may, but it would be wise to prepare yourself if the stock market heads south.

Wear a Mask

If you’re wondering whether to wear a mask or not, consider this. By wearing a mask, you control the depth of the economic fallout from the pandemic and help businesses and cities reopen. As of yesterday, 886 people died from COVID-19 in Japan. In the United States, 105,557 have died from the same virus. According to Worldometers, the COVID death rate in the U.S. is more than 47 times higher than the death rate in Japan (per one million). The number becomes more shocking when you consider much of Japan’s economy stayed open during the pandemic. Then why the difference? Some attribute the lower mortality rate in Japan to the strict protocols on wearings masks. If you’re not concerned about yourself, please wear a mask for those around you and in support of businesses reopening safely. If you are interested, there is a good article from Vanity Fair highlighting the benefits of wearing a mask.

Finally, U.S. adults are stashing less away for retirement, a survey from Bankrate.com shows. Of the 18% making fewer contributions, a loss of income was cited as the single biggest reason. About 27% of people working or recently unemployed have tapped their retirement funds or plan to do so, especially younger households. That means they may miss out on decades of compounding, the firm said. This brings us to the tip of the month…

Noble Wealth Pro Tip of the Month

If you have been, or will be laid off or furloughed, consider these items:

• If you have a Flexible Savings Account with your employer:

  • Spend the money while you are still employed (or while covered under COBRA).

• Will you lose your health insurance soon?

  • If so, consider making sure you are up-to-date on medical and dental exams and any medical procedures.

• If you are still employed, do you have a Home Equity Loan or Line of Credit?

  • Talk to your bank (or lender) to discuss your options before losing your job. These loans have lower rates than credit cards and can be a useful source of funds until you begin working again. Once you lose your job, these options will probably not be available.

• Do you have any stock options?

  • Review your Equity Plan documents as it may help you coordinate your departure with the vesting schedule

  • Review post-termination exercise periods which are usually about three months from your last day of employment (in some cases you must exercise the options before your departure).

  • For private companies, consider the impact of the shares being illiquid and if there are any clawback or repurchase rights.

• Will your income be substantially lower this year? If so, consider the following:

  • If you have cash available, consider Roth conversions.

  • If you have securities with large embedded gains and your marginal tax rate will be 12% or less, evaluate selling these investments to take advantage of the favorable capital gains rates.

What Have We Been Doing?

On Thursday, May 27th, Grant hosted a webinar with Alan Yu, from My Financial Counsel, to educate their clients on the intricacies of ESG and socially responsible investing. If you are interested in making a difference using the investments in your portfolio, watch this video. It’s packed with great information on the subject.

Enjoy your summer and stay safe!