Stimulus Debate Starts
The stock market is anticipating a stimulus passing. This situation is a bit different from typical political expectations because the market is 100% certain one will pass. If you just looked at the tape, you wouldn’t even realize the economy could implode without a stimulus. The stock market is pricing in a weak economy by pushing the stocks that do well in this social distancing environment higher and pushing the cyclical stocks lower.
However, if there isn’t a stimulus, even Amazon would be hurt. No company can avoid the consequences of a depression.
Something will be passed. It’s a catch 22 in that everyone is so confident a stimulus will pass because it is so necessary. You’d think the market would consider the daunting potential of one not passing, but that’s not the case. You can’t bet against something passing because you hink it will pass.
However, you can bet against the cloud stocks because you believe even in the best case scenario, they are overvalued. When excess capital chases an industry, competition increases which lowers margins.
McConnell’s Initial Proposal
Let's discuss Mitch McConnell’s potential proposal because his ideas were leaked. We're working with the assumption that there will be a compromise in which the GOP and Dems each get some of what they want.
First measure supported is giving schools extra money to help with reopening this fall. Keep in mind, in some parts of the country, school starts in August which means we will know how this will play out in a couple weeks. Obviously, announcements can be changed which is why it's good to wait until the actual school year.
Looking at this on a household by household basis, parents will be in a bind because it’s tough to take care of children while working. Unfortunately, many people will be out of a job or forced to go to work and pay for a nanny. Best case would be working from home, but it’s far from ideal.
Second proposal is liability protection for restaurants, hotels, hospitals, universities, and schools. Dems oppose this, but McConnell called this his red line which means he won’t budge from it. It’s extremely important for hospitals to get help. Many are going bankrupt as most procedures are being delayed. Health insurance companies are seeing a windfall from this, but they legally need to pay out a certain percentage for procedures. Therefore, these aren’t ‘real’ sustainable profits.
Thirdly, McConnell wants more money for testing and vaccine research. Both sides likely agree to that. Testing is up, but in some areas, it takes a long time to get tested and get a result. There are 100s of vaccines being worked on; more funding is never a bad thing. On Monday, Oxford announced positive phase one results in its vaccine. We need to wait until phase 3 trials are successful before a vaccine is administered.
4th idea is to extend PPP loans. GOP wants the $134 billion left to be appropriated for phase 4 of the reopening. Goal will be to help small businesses that lost revenues. 5th point is a payroll tax cut. President Trump has supported this in the past, but nothing has been done. This will only help the people who are working obviously.
GOP doesn’t want to directly help out state and local governments, but it wants to ease previous guidelines on how the leftover CARES money can be spent so it can get to local governments. We can say for sure that the Democrats will oppose that. Hope is the compromise favors more stimulus than less. In other words, the hope is the GOP gets tax cuts and the Dems get help for state governments. The more stimulus, the better for the economy and the stock market.
Earnings Season’s Early Findings
Earnings Scout is focusing on the impact of Q3 EPS changes instead of actual Q2 earnings. It's good to focus on future earnings. They are highlighting this in the table below because the stock market is up so much from when it was pricing in Q2 EPS weakness.
As you can see, Q3 EPS estimates from the first 47 earnings reports were up 3.43% which is dramatically above the average of -3.58%. It’s good to see industrial and financial estimates up. Some investors are worried about the momentum tech firms. Estimates are probably too high for those firms as these economic restrictions won’t last forever.
COVID-19 Green Shoots
Many hve been calling for the COVID-19 situation in the hotspots to improve. So far, the results continue to look solid in Arizona which was the first state to have a 2nd spike in cases. You can see in the chart below how Arizona started to see a spike in early June, while Florida’s spike started in mid June.
You can confidently predict that the record high in the 7 day average of new cases in Arizona won’t be surpassed this summer. There were 1,559 new cases on Monday which is above last Monday’s 1,357, but the intermediate term trend still remains lower. On Monday, hospitalizations in Arizona fell to the lowest level since July 3rd.
Once Florida shows consistent improvement, it’s almost impossible for national cases to reach new highs. There were 10,347 new cases on Monday which is down from 12,624 last Monday. The data dump on July 12th where there were 15,300 new cases, won’t ever be surpassed. It’s great to see that the peak in national new cases is almost in, yet the number of new deaths per day hasn’t spiked.
In early July, we said to wait 2-3 weeks to see if deaths increase. It’s now clear that new deaths per day won’t spike anywhere near the April peak. Deaths lag cases, so deaths per day might peak in early August. By mid-August we will see restrictions in the south and west lifted again. We could have an economic boom in the fall if the economy fully reopens and we get a stimulus.