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Let’s Plan on a Slow Economic Recovery

A recent survey asked a group of macro quantitative economists to predict the likely trajectory of the US economy, as the US struggles to reopen. Our reservations aside about the futility of trying to predict too far into the future, this “expert” survey confirms my working hypothesis that the recovery will likely take years. There is a range of opinions, but over half of the economists foresee the US economy not returning to pre-crisis levels until the second half of 2022 or later. To use a medical analogy, the pandemic has been an economic heart attack. Yes, we expect full recovery, but the patient in recovery is going to need time, support and understanding.  Expecting a sharp recovery without plateaus or setbacks is wishful thinking, as far as I am concerned. Simply skimming the linked article will give you a sense of what economists are thinking for now, with survey updates planned.

  • Powell’s View: Fed Chairman Powell is more optimistic, seeing the recovery stretching into 2021. His views carry weight with me, but he has no way of knowing for certain. New York Times

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Markets React Sharply to Good and Bad News Related to Potential Vaccine

The markets went for a little roller coaster ride this week.  It started with a Boston company, Moderna, releasing interim positive results from its first human COVID-19 vaccine trial. It stated there were no issues with participants producing antibodies needed for an immune response and they tolerated the vaccine well.  WCVB  As expected, the markets reacted positively with stocks gaining sharply and analysts believing a vaccine could start being available by year-end.  Morningstar  The next day stocks dropped sharply as skeptics stated not enough data was released for outside rigorous analysis and questioned some assumptions in the press release.  Statnews  By Wednesday, stocks were reacting to economic data and bounced back.  CNBC

The volatility in stocks this week is the new normal for investors.  Any good or bad news regarding containing the virus or finding a vaccine will have an outsized effect on the investment markets.  Until there is clarity regarding the containment of the virus or a vaccination, market volatility will continue. 

  • Planning for a Vaccine:  The first human trials for vaccines are wrapping up and plans are starting to unfold as to which countries and workers receive it first.  Healthcare workers and those in essential services will be at the front of the line, but it gets a little trickier after that, including which government agencies are involved in mass dissemination.  WSJ

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Reopening and the Reinvention Story of Tock

The US economy has begun to reopen. The early stage efforts appear not to have generated a significant increase in new diagnosed Covid-19 cases yet in most states. Axios But the various models continue to predict ominous Covid-19 death levels. NPR As reopening expands, there will be many forms of “voting” or “betting” occurring. Some public health officials (e.g., Dr. Fauci), concerned that the health risks of congregations remain high, are voting for caution. CBS News Federal, state and local leaders are tilting toward more aggressive reopening or more conservative, depending on their perspective, knowing that they face election accountability.

Many US stock investors have bet that the reopening is likely to be relatively successful, given that the S&P 500 Index has quickly recovered almost 60% of its 34% flash bear market loss in the face of plunging economic metrics. Of course, stock investors get to vote every day, so may change their votes rapidly if the reopening starts to falter. Lastly, you and I will vote on when we feel safe re-engaging in certain economic activities. You can reopen a restaurant but when will the customers return in critical numbers? You can restart sports events but when will fans return in masse to the arenas? Washington Post

  • The Story of Tock: For sure this sounds like a Disney movie, but I share it as an example of how many businesses and non-profits will need to reinvent themselves as a result of the pandemic. Tock, a startup, featured a prepaid reservation system for high-end restaurants. In 2019 it processed $350 million in transactions for restaurants while employing around 100 employees. When the pandemic hit, it faced an existential crisis where its revenues could go rapidly to zero overnight. Within months, Nick Kokonas, the legendary restaurant entrepreneur, reinvented and retooled Tock as a system that processed takeout orders for restaurants. Tock is on track today to process $1 billion in takeout orders annually for restaurants. Meanwhile Open Table is laying off employees. And this is only half the story, as Kokonas and his restaurant partners have successfully reinvented their own acclaimed restaurants to deliver takeout while maintaining a strong commitment to employees. CNBC Tim Ferriss Show

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States Start Reopening Businesses and Tracey Daigle in the News!

In the U.S., we are only a week or two past the peak in deaths attributable to the coronavirus.  It is against this backdrop that governors are trying to make decisions on how to reopen state economies even as many states are still seeing increases in infections.  Axios  Though the projections are that the deaths will gradually drop during May and the following months IHME, it is a balancing act fraught with risks.  WSJ  So, we are now embarking on the next stage of this epic event where states are experimenting with opening businesses. CNN  Despite the different strategies, rules, etc., the states are all looking for the same thing – sustainable practices that will allow all businesses to resume without overwhelming the healthcare system.  So far, investors have been optimistic in anticipation of businesses opening with markets gradually moving higher the last month, despite the loss of 20 million private-sector jobs in April.  MarketWatch  As mentioned in last week's email, the numbers to watch for the next couple of months are not economic, but the trending of new cases, deaths, and hospital's ICU capacity.  If those numbers are stable and manageable, the opening of the economy will continue, leading to businesses starting to recover.

And now for some RSWA news!  We are happy to announce that RSWA's own Tracey Daigle was featured in an article in Maine Biz and was also on the cover!  The article highlights women who are leaders in Maine's wealth management industry and they rightly recognized Tracey for her leadership position.  Congratulations Tracey!  Maine Biz

  • Warren Buffett Speaks to Investors:  Berkshire Hathaway held their annual meeting this past week.  Thousands of Berkshire investors usually descend on Omaha for the dubbed "Woodstock for Capitalists" gathering, but this year's meeting was held virtually.  During the Great Recession crisis, Mr. Buffett was an optimistic and reassuring voice despite the calamity.  That was on display this meeting as well, but he was also very cautious and quite happy to have a large cash reserve on hand.  NYT

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Markers and the Metrics That Matter for the Balance of 2020

A client astutely asked what we saw as the “markers” going forward over the next few months. Ordinarily, we might point to traditional economic and financial data (i.e., earnings, GDP growth, interest rates, inflation, etc.). But now, as the US begins re-opening, the metrics that matter in the short-term are the Coronavirus dashboard numbers (new confirmed cases and # tested). Axios If these metrics are relatively positive, from state to state and from community to community, then we expect to see the US economy gradually recover. Long-term, the US only recovers fully when there is widespread effective Coronavirus testing, vaccination and treatment.

The US economy has severely contracted. We expect US economic data for the first, second and third quarter to be negative, perhaps shockingly so. Whether we will see more positive data for the fourth calendar quarter of 2020 will depend almost entirely on whether the re-opening is successful and does not trigger a meaningful Coronavirus resurgence. While everyone acknowledges the need to get back to work, consumers and workers are concerned about trying to move too fast. Washington Post Stock market investors, who tend to look forward, appear to be relatively positive, with the US recovering over half of its 2020 losses to date. Business owners and executives, fearful of damage already done and to come, are less sanguine. Axios

What are the long-term implications for this pandemic and the massive government response? What will change? Some good minds are thinking about these questions:

  • The End of Globalization? World trade benefits all and will continue, but the world economy is going to look different. Countries will increasingly think more about protection in the broader sense. Do you want a high percentage of your pharmaceuticals coming from a global competitor? How dependent do you want the key supply chains of your leading companies to be on other economies, friendly or otherwise? New York Times Axios

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The Price of Oil Goes Negative

On Monday, the price of oil dropped to -$38 per barrel.  Yes, negative thirty-eight.  With the economy drastically slowing, oil reserves are building up and storage facilities are running out of room. Even though producers have cut production, it is not enough to offset the drastic drop in demand. So, this week when the current monthly oil contracts were expiring, the owners of the contracts were paying over $30 per barrel for someone to take possession of the oil and store it.  As of midweek, the oil markets had recovered to positive territory in the low teens.  The next monthly oil contract is set to expire on May 18th and the price may go negative again.  Unfortunately, for those still driving, filling up your tank may be a little cheaper, but those negative prices will not be showing up at your local gas station any time soon.  CNN  WSJ

Stocks had been rallying the past couple of weeks, but the oil price shock on Monday set them back.  Stocks stabilized by midweek though there are concerns about the economic fallout in regions with large energy sectors and the government may step in to help.  WSJ  CNBC  Over the coming weeks, markets will be attuned to how states will reopen their economies and those announcements are expected soon.

This month marks the second anniversary of the RSWA weekly newsletters Coffee Notes and The Friday Buzz.  We have had great feedback on the newsletters and appreciate any comments or suggestions for improvement.  And if you have not shared it yet, now is the perfect time to do so!  Thank you again for reading!

  • Another Stimulus Bill Close to Done:  Congress is close to completing another stimulus package, this one for almost $500B. It is expected to pass and will include additional funding for small business loans, hospitals, and coronavirus testing.  This would be the fourth stimulus bill to pass Congress in response to the virus and together they total $3T.  Reuters

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6 Ways We Make Working Remotely Easy for Our Financial Advisor Clients

The coronavirus hit hard and fast.  Everyone is adapting to the new reality of social distancing, staying at home and sheltering in place.  Millions are learning how to work remotely and use technology to socialize.  And as we adapt and get used to remote tools that connect us to the world, many have discovered a new way to work with a Financial Advisor.  When face to face meetings may have been preferred before, many now choose to work with advisors through technology.  For those who don't want to fight traffic or are struggling to find time in their calendars, remotely working with an advisor may prove to be a more efficient and enjoyable experience than in-person meetings.

We have successfully worked with clients located across the U.S. for many years.  From our experience, there are several things we have found that make it easier for clients to work with us remotely.

1. Client Portals 

Being able to view accounts and exchange paperwork is essential when working with clients.  Providing a client portal is a big help when paperwork has to be shared or a signature is needed.  A portal is a secure website that a client can access by establishing a password.  It allows clients to view account positions and pass documents back and forth to their advisor securely.  Many times, this is even more efficient and easier than mailing documents.  One thing to note is that the client will need access to a printer and scanner to first print, sign and then upload the signed document to the portal.   Other important information can be posted through the portal as well, such as quarterly reports.  Having a client portal is one of the best tools when working together remotely.

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How and When to Re-Open the US Economy?

How and when to re-open the US economy is the question, with some pushing for a re-opening to begin as soon as May 1st. The widely respected Murray Model (COVID-19 Projections) does suggest that the US may have passed the peak of anticipated deaths per day but that isn’t to say that the pandemic is winding down. And note that the model assumes that social distancing will remain in place until the end of May. Given that a premature re-opening could trigger a virus resurgence, we trust that the state and local officials making these calls err on the side of caution and start with very low risk workers. Washington Post

The US stock market continues its wild ride. The bear market bottomed at a 34% loss from its high but had recovered 20% of that loss as of early this week. Our view is that stock investors have likely written off what will surely be dismal 2020 GDP and earnings numbers and are already focused on attempting to project where the US will be in 2021 and even 2022. Moreover, they are counting on massive monetary and fiscal stimulus. New York Times Has a stock market “bottom” been made? We don’t know but infer from the rapid bounce back that few investors have given up on stocks.

This is surely going to be a long economic recovery, stretching into 2021 and perhaps 2022 or beyond. COVID-19 disappears as a serious national health risk only when we have all three of the following in place: effective testing; a vaccine and a successful treatment protocol. The need for social distancing will abate in time, but we wonder if our lives may change in that respect at least for the foreseeable future. CNBC

Please read on for more of the following: Black Swans; Maine Medical Joins Remdesivir Trials; Chairman Powell Gets High Marks; A Zoom Tutorial; Courage During Difficult Times; and A Quote to Contemplate.

  • Black Swans: The coronavirus is understood in the investment world as a “black swan”. Black swans were so rare in nature as to become a metaphor for an unusual and unpredictable event. By its nature a black swan cannot be anticipated but should we be planning for more frequent “black swans”? Have globalization and technology increased the odds of them occurring? Plan for black swans to occur frequently and we may live narrow, fear driven lives. But perhaps we need to tilt more in our planning at all levels for the possibility of an acceleration in the frequency of “black swans”? Wall Street Journal

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Stocks Continue Advancing But it is Prudent to Remain Cautious

This week the stock markets continued to rally based on the belief new virus cases were peaking and there is potentially more government stimulus on the way.  Reuters  Evidence is starting to mount that there is a decrease in new hospitalizations and admittances to ICU for some of the earliest and hardest-hit places in the U.S.  Axios  Also, many are viewing Italy as a precursor to the U.S. and virus deaths in Italy are now at a 25-day low.  Reuters

There is still plenty of bad news including rising U.S. death rates, skyrocketing unemployment claims, and the British Prime Minister requiring hospitalization from the virus.  BBC  Despite that bad news, the markets were starting to look past the virus and toward the recovery.  But we would caution that many bear markets have strong stock rallies within them, only to give up the gains shortly thereafter.  Bloomberg  The good news is welcomed, but we still have a long way to go before there is an all-clear signal that we are firmly back on the road to recovery and investors should remain braced for continued market volatility.

  • Can the U.S. Afford the $2T Stimulus?  Many investors are asking how the U.S. will pay for the huge stimulus package.  But interest rates are low on debt issued by the U.S. Treasury with strong demand from investors and quantitative easing.  There is a good chance the annual costs on interest for borrowing for the trillion-dollar bill could be $30B or less.  A paltry sum for a $20T economy and equivalent to about 2-3 days of normal annual federal spending.  NYT

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Making Sense of Surreal Times

The substantial stock market rally during the last week helped, but we are still coming off the worst quarter for the Dow ever. The global Covid-19 pandemic continues, and the US is now at the epicenter. Stock market investors, especially large institutional investors, are forward looking. Many may already be discounting 2020 earnings and economic growth as negative and trying to assess the outlook for 2021.

We counsel patience. Axios There must be a credible consensus on a rough timeline for Covid-19 to abate in the US and permit our economic (and social) lives to recover some sense of normalcy. CNN Then and only then might we see a sustained stock market rebound. Buoyed by the massive monetary and fiscal stimulus, some investors may jump in a little earlier in an effort to capture low prices, but we predict continued heavy volatility until there is light at the end of the pandemic tunnel. MarketWatch

One RSWA focus has and will be discerning the implications of the so-called CARES Act for our clients. An immediate question will be cash distributions to some individuals. Here is one summary. CNN The Treasury Department has already reversed itself on one decision, as social security recipients who do not file tax returns will be able to get their checks by direct deposit. Washington Post Here is another resource for the legislation’s impact on retirees. MarketWatch Much more to come on this topic.

One last thought. We have been impressed by the high quality of questions posed by several clients. Many recognize that this “black swan” event is a game-changer and are already asking what opportunities will lie ahead and where they will be. Others, while acknowledging the critical nature of short term massive fiscal and monetary support, are concerned about the implications for the dollar and our national debt. New York Times

Please read on for more of the following: Kindness-Also Contagious; The Science Behind Coffee; Babylon Berlin; Groundhog Day; A Quote I Like.

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