Mixed Messages and Economic Data

In another choppy week, investors put some chips on the table only to take them off later.  Traction is hard to come by with new uncertainty regarding the rise of confirmed COVID-19 cases and the potential for extended closures in states experiencing the biggest upticks.  Also factoring into the increased volatility are institutional investors, pension funds, and hedge funds making last minute changes to their portfolios before the end of a quarter.  One thing is certain and that is all eyes will be on corporate earnings when they’re announced in a few weeks’ time.

It was a mixed bag of economic and corporate data this week. On the good side, mortgage rates continue to set record lows and companies are prudently reducing inventory, ending stock buyback programs, and conserving cash wherever they can. On the not so good side, mortgage delinquencies rose to the highest level since 2011, retail sales are not making the recovery some had hoped, and manufacturing remains in contractionary territory despite having improved some over the past month. Adding icing to the cake, another 1.5 million people filed for unemployment bringing the total to almost 49 million or roughly 30% of the U.S. workforce in the past thirteen weeks. The return to work for these people hinges on the economy reopening and, at least for now, it appears that will be delayed.

If there is one thing investors don’t like it is mixed messages and it got a big one this week when White House Adviser, Peter Navarro, said that the trade deal with China is finished, due to China’s late warning on the coronavirus outbreak. While the President questioned the deal in May and whether China was complying, and also threatened to cut ties with Beijing as recently as last week, the White House was quick to come out and deny that the trade deal was being scrapped which helped reassure the stock market. However, tariffs are not off the table as the U.S. weighs new tariffs on $3.1B of imports from France, Germany, Spain, and the U.K. This comes as the European Union considers prohibiting U.S. travelers from entering Europe in return for European travelers who are still banned from entering the United States under virus travel restrictions. If you long for the days when markets were free and both international and domestic travel was open, you’re not alone.

In company news, Apple had its annual developers conference (WWDC) and among the many software updates coming, it announced it will no longer be purchasing chipsets from Intel. Apple will be developing its own chips going forward and outsourcing their production. In other company news, it seems McDonald’s may not be renewing its contract with Beyond Meat which makes plant-based patties, among other things. Not long ago these meat alternatives were all the rage, with the stock prices to show for it, but when a company the size and scope of McDonald’s reconsiders, it may be worth noting. It could be this fad has run its course or it just may be McDonald’s looking to squeeze its supplier. Time will tell.

Needless to say, with the uptick in coronavirus cases, investors took a risk-off attitude this week as demonstrated by the steep declines in both the airlines and cruise ship companies. Theme parks, many of which had been planning on a July reopening, are back to the drawing board as it looks like the delayed openings may be extended into September. However, one bright spot is McCormick & Co. which makes spices and flavorings. Despite the boring nature of its business, it has done quite well this year, up over 5.5%, and reported much better than expected earnings yesterday with revenue growing almost 8% year-over-year. In this environment, that’s nothing to sneeze at! There are hidden gems to be found if you know where to look and are patient.

It is easy to get caught up in the market volatility and growing political unrest.  Let's not forget that the goal is to invest for the long-term, understanding there will be bumps along the way.  While it may sound trite to say, “this too shall pass”, it will, and on the other side we’ll look back, breathe a sigh of relief, and be grateful that we got through it together.  Sometime in the distant future, when things have returned to normal, you’ll explain to your kids or grandkids about how 2020 was the year we stayed home, stockpiled food, and wore face masks everywhere we went.  Indeed, this is one for the history books.

Bruce J. Mason, MBA