Of Interest on the Economic Outlook

[TMan92]

My financial advisor sent me this from a call with the CIO of Blackstone. Lots of good stuff.

KEY TAKEAWAYS:


How should an investor think about current S&P 500 Index valuations?

Even at $150/share, we are currently trading at 18.5x earnings (2,771 on the S&P 500 Index)

There is a current tug of war between liquidity and fundamentals in the stock market and the bond markets)

The bullish case, the case of excess liquidity, talks to two factors:

1. TINA – There Is No Alternative (low interest rates make equities more attractive, all else equal)
2. The absence of risk -The Fed is backstopping so many different markets, including investment grade bonds and “fallen angels” (recently-downgraded BB-rated bonds); so the Fed is essentially taking on the risk of a lot of asset prices. BlackRock thinks that this dynamic creates a lot of long-term risk because the Fed must eventually withdraw from buying these assets.

The bearish case, in the near-term, talks to six factors:

1. Slower Growth
2. Higher corporate and personal taxes to cover deficits that are growing rapidly with global fiscal stimulus packages
3. Lower profit margins as supply chains are reconfigured
4. Higher labor costs as workers come off unemployment
5. Less leverage will be used by companies (which all else equal lowers earnings)
6. There will be smaller dividend increases and fewer stock buyback

As a result of this tug of war between liquidity and fundamentals, there will be a much higher level of stock market and bond market volatility for some period of time.



OTHER KEY TAKEAWAYS:

1. Thanks to rapid and massive fiscal and monetary policies taken to-date, we have avoided a full-blown credit crisis.
2. We need more fiscal stimulus in small business lending. Why? Because the $350 billion in the small business assistance program covers only one month’s worth of payroll expenses for small businesses.
3. The course of Covid-19 will determine how deep this recession lasts.
4. U.S. and global economic recovery will take a lot longer than the current consensus viewpoint.
5. We will continue to see jobless claims at elevated levels for a long period of time since there are many more high-contact, public-facing jobs (restaurants; leisure) than low-contact jobs. (Alan’s note: This will also perpetuate and increase levels of wealth inequality).
6. We will see unemployment levels as high as 20%.
7. One person’s spending is another person’s income. So as we think about a staggered reopening of the economy with social distancing in place for a prolonged period of time, this materially, adversely impacts the global leisure industries (which are 10% of U.S. GDP), and in turn slows down the overall U.S. economic recovery.
8. If history is a guide, little of the $975/week check from the government’s fiscal stimulus will be spent on discretionary spending. And this is an important point: the building of savings replaces what would otherwise be economic growth.
9. At the end of 2021, we may still see an unemployment rate near 10% rather than the consensus 4.5% unemployment rate projection currently for the end of 2021.
10. So in the U.S., 25% of the economy (10% tied to the leisure service area and 15% tied to capital spending/investment) -- and in Europe 30% of the economy -- are tied to areas whereby economic recovery rates will be slower than what consensus expectations have currently projected.
11. We need accurate testing (not just testing) to speed up the elimination of social distancing.
12. This will be a short recession, but it will be a slow and plodding economic recovery. After a sharp snapback in growth rates, the amount of time it takes to pass $21.7 trillion in U.S. GDP will not appear until 2023 or later! There is just too much slack in the economy.
13. In the U.S., 25% of the economy (10% tied to the leisure service area and 15% tied to capital spending/investment) -- and in Europe 30% of the economy -- are tied to areas whereby economic recovery rates will be slower than what consensus expectations have currently projected.
14. This will be a short recession, but it will be a slow and plodding economic recovery.
15. After a sharp snapback in growth rates, the amount of time it takes to pass $21.7 trillion in U.S. GDP will not appear until 2023 or later! There is just too much slack in the economy.
16. On average, after a recession in the U.S., it takes about 3.5 years for S&P 500 earnings to get back to their prior peak.
17. Emerging market companies will be challenged given their large amount of U.S.-dollar-denominated debt and the fact that they are exposed to economically sensitive industries.
18. The U.S. is going to make a an increased effort at ramping up spending in two areas: medical healthcare and technology. A lot of the government spending programs (like expanded unemployment benefits) will become more persistent and then they will likely become permanent! This may lead to the beginning of a Universal Basic Income structure in the U.S.!
19. There will likely eventually be higher rates of interest even in the absence of inflation.
20. The least Adversely Impacted Economic Sectors will be Technology; Consumer Staples; and Healthcare .
21. We may have seen the peak of globalization just pass.