Rediscovering Value
Investors need to have clear data in order to make decisions about value, but simply don’t have enough right now. The economic impact of the coronavirus is wreaking havoc with the ability to understand the value behind investments and financial resiliency. Value is not gone, but it is not easy to evaluate.
This third week of April is busy with the quarterly ritual of public corporations announcing their earnings. Measurement of these earnings, and the promise of their future growth, are the foundation of pricing in the stock market. This year, first quarter earnings contain a part of the decline most companies expect from the shelter-in-place slowdown, but only a small part. The second quarter will be more dramatically affected. Therefore, it is companies’ guidance on expectations for the rest of the year (and particularly the second quarter) that equity investors are focused on.
In the bond markets, liquidity has been the most dramatic concern, and the target of much of the Fed’s monetary stimulus — even if the household checks that arrived this week have gotten more headlines. Liquidity makes transactions and economic activity possible. The stimulus from the Fed is finally starting to reach markets, and is allowing investors to lift their focus to intermediate term issues of business resilience and opportunity.
Progress on the coronavirus front and global economic data is important for investors as well. Some of the data this week is good. China continues to re-open its economy, with modifications to factory shifts, cafeteria protections, and testing. In Germany, Chancellor Angela Merkel cited “fragile intermediate success.”[1] There they have done extensive testing and contact tracing, limiting their death rate, and reducing new cases; they plan to allow certain shops to begin re-opening next week.
Unfortunately, some of the news is bad. China clocked a 6.8% decline in economic activity in the first quarter, their first decline in 50 years.[2] Tokyo’s healthcare system is said to be on the brink of collapse as cases there accelerate, and as a result, their lockdown was just extended to the entire country.[3] In the US, we have had a patchwork approach and are getting patchwork results — and the lack of executive coordination is frustrating everyone. Our unemployment filings are astronomical — and it is unclear how many workers may be rehired sooner — or later.
Sustainable recovery in stock prices doesn’t depend only on good news; it depends on factual information and clarity on how things will develop in the future. China’s re-opening is going slowly, but it is creating a clear path. Germany will also be a closely watched prototype. In the US, the current monetary stimulus from the Fed is working its way through the system and financial markets are responding — but it may not be enough. Applications for the $350B allocation for the small business Payroll Protection Program totaled 1.7 million; the initial funds are entirely allocated, and Congress is close to agreement on an additional $250B for the program. Progress and clarity on this funding will be a closely watched indicator of liquidity needs from the real economy.
Flattening the Financial Curve
Our efforts to mitigate the worst outcomes of the pandemic focus on a strategy we are all newly familiar with, called “flattening the curve.” In the financial world, the Fed is also focusing on flattening the financial curve to minimize the collateral damage from liquidity problems, and give the real economy time to work through the current challenges.[4] We particularly like these graphs developed by our colleague at another financial advisory firm.
The liquidity the Fed has provided, and has promised to continue facilitating, provides time to re-orient. It creates space for businesses to finance and design new workflows, and to entrench new cultural norms that improve public health. The market assessment of value via stock and bond prices will likely continue to gap downward and upward nonetheless as better data becomes available, but it gives us optimism that we have a key financial component required to get through this crisis.
In terms of our daily lives, we are starting to feel the ability to stay safe and be careful — and still get on with what needs to happen. Our North Berkeley team in its virtual North Berkeley environment is still actively working with portfolios to shepherd them through the volatility, and integrate the specific life needs each of our clients with other financial decisions.
As we keep moving forward, be safe, be in touch, and have a wonderful weekend!
Read more articles at northberkeleywealth.com
1 Angela Merkel public address, April 15, 2020.
2 Hong Kong, CNN Business, https://www.cnn.com/2020/04/16/economy/china-economy-gdp/index.html.
3 Japan Today, “Japanese Healthcare Facilities Stretched Thin, Doctors Say,” April 12, 2020, https://japantoday.com/category/national/the-latest-japanese-health-care-facilities-stretched-thin and NPR, “Japan Declares Nationwide State of Emergency As Coronavirus Spreads,” April 16, 2020.
4 Adam Jordan, Paul R. Ried Financial Group blog, April 13, 2020, https://www.paulried.com/blog/the-federal-reserve-is-also-trying-to-flatten-the-curve-of-asset-prices.
Disclaimer: This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
