Good Morning

I hope this finds you and your family safe.

The markets rose over 10% in April, the first time in recorded history we have witnessed a double digit drop in one month followed by a double digit increase the next. The bounce in the markets has been fueled by the largess coming from the Fed, the federal government, and a peak in infection rates. As first quarter earnings reports begin to roll in, we are seeing the tip of the iceberg as to the economic damage done so far and that to come. GDP in the first quarter was down 4.8% (chart below), and is estimated to be down 30-50% in Q2. We experienced about four weeks of weakness in Q1, we will experience an entire quarter in Q2. The market seems to be pricing in a quick recovery in Q3, which seems unlikely given the amount of damage done to the economy, the progression of Covid-19, and the number of jobs lost (now 30 million and rising). With the market down just over 10% from its highs, it seems unlikely that we won't see another downturn in the markets as the damage becomes more apparent. As I stated a few weeks ago, I would happily be wrong on this outlook.

The average stock began recovering versus the big five (Microsoft, Apple, Google, Amazon and Facebook), with a 400 basis point performance spread between the equal-weight S&P and the traditional cap-weight S&P this week is among the most statistically extreme (99.9th percentile) ever recorded. Somewhat counter-intuitively, high beta stocks continue to outperform low beta. As an example, both the banks and semiconductors were strong while the Utilities traded to fresh 3-month relative lows. 

As the country slowly moves back to work, concerns about employees not wanting to return to work because of health worries and income will create a drag on the recovery. Some lower-paid workers on unemployment are actually making more right now than if they were to return because of the boosted benefits provided by the government. This program needs to be scaled down to encourage people back in the workforce when jobs become available. California, which continually sets a new bar for making itself unattractive for businesses, has added a caveat to the return to work rules allowing workers that "feel unsafe" to remain on unemployment. If these workers are terminated or otherwise retaliated against for refusing to go into work, they may file a retaliation claim with the Labor Commissioner's Office. Most states have announced plans to reopen in stages with schedules for select businesses, followed by restaurants, over the next few weeks. The notable exception is California, which seems to be moving in the opposite direction.

On the viral front, good news came from a Gilead trial for treating the virus. Patients who received Gilead's Remdesivir showed a recovery rate of 11 days versus 14 days for those on a placebo. The death rate for those on the drug was 8% versus 11% for those on the placebo. Remember that those in the hospital are among the sickest patients, and a comparable measure of influneza patients has a mortality rate around 10%.

All economic results have been weak, but personal pending declined by 7.5%. The drop in consumer spending has an outsized impact as consumer spending is roughly 2/3 of the US economy. The weakness in spending is exacerbated by a shift towards consumer staples such as food and toilet paper, which carry lower margins than consumer discretionary items. The resulting lower margin mix has put additional pressure on retailers, although delivery services such as Instacart have benefited.

State budgets will continue to come under pressure, especially in states with large unfunded pension obligations such as New York, New jersey, Illinois and California. Federal tax deposits were down 45% in April, a sign that states will also report a significant decline in their April taxes. The decline in tax revenue is due to an automatic 90-day extension of tax returns and filings, from April 15 to July 15.Watch for a surge in July, however, states will have difficulty filling the budget gap until that date.

After the first warm weekend of 2020, Governor Newsome imposed his version of Marshal Law on Orange County by shutting down the beaches. The Orange County Sheriff's office announced that they would not enforce the ban as they view it to be unconstitutional. The ban was catalyzed by doctored news photos of people at Newport Beach last weekend. The angle of the pictures used were taken at an angle that made the lifeguard towers in Newport appear to be about 30 yards apart and thus the crowds quite densely spaced. The aerial photos clearly showed the beach was sparsely populated, but the Governor, enjoying his newfound self-anointed dictatorial power, closed the beaches anyway. OK-political rant over ??

I have discussed the plethora of Fed programs designed to help the credit markets and employers. The table below is a summary of those programs and money put to work so far.

Food has been the largest expenditure for consumers over the past two months, making it difficult to acquires some categories of food such as meats. Recent closures of meat processing plants will add to the difficulty of obtaining meats.  The picture below shows a number of meat processing plant closures occurring in the past couple of weeks.  President Trump has stepped in to offer aid and technology to keep these businesses open.

Have a great weekend, hope to see you at the beach