Rewriting the Rules
The stock market recovery, since the beginning of April, has been nothing short of miraculous. With the exception of June, the markets have recovered much if not all of the losses experienced in March. Even the Dow Jones Industrial Average (DJIA), which has lagged much of this year is now in positive territory for the first time since late February. This just demonstrates that the market expects the economic recovery to continue and earnings to improve through the end of the year.
Despite an expectation of economic recovery and an end to the current recession later this year, economists believe Congress should reinstate supplemental employment insurance benefits. Most of them also support extending the Paycheck Protection Program (PPE) for small businesses further bolstering the recovery. Perhaps part of the reasoning is that companies, particularly in the hardest hit travel and resort industries, have been doing their best to maintain staff. We learned this week that MGM Resorts is planning on making permanent 18,000 employees furloughed earlier this year, Accenture is looking to cut 25,000 jobs worldwide, and airlines like American announced 19,000 employees will be let go in October. We anticipate the next round of stimulus could some in September when Congress is back in session.
In other news, there was a groundbreaking announcement from the Federal Reserve this week that took many by surprise. In a significant policy change, Fed Chairman Jerome Powell announced the latest plan to goose inflation back up to a healthy level. In a nutshell, instead of putting a 2% cap on inflation, the Fed will now allow inflation to run hot for extended periods of time to allow for an “average inflation rate of 2%.” This is a bigger deal than it sounds as it will allow the Fed to keep interest rates at these historic lows for much longer than originally anticipated. In essence, it is the exact opposite of Paul Volcker’s tenure at the Fed in the 1980’s when he raised interest rates steeply to curb runaway inflation. The goal appears to be avoiding “Japanification,” or the deflationary environment that led to Japan’s lost decade. Expect interest rates to remain near zero percent until both employment and inflation are stabilized at more healthy levels.
As for the pandemic, the number of positive test results continues to fall which is a very welcome development. New treatments are being explored, including one that shows some promise for those infected. The FDA approved the use of “convalescent plasma” which transfuses antibodies from the blood of recovered patients to help treat the sickest patients battling the virus. The Health and Human Services Secretary stated a 35% better survival rate in patients being treated in this fashion. Additionally, Abbott Labs announced it now has a COVID-19 test which costs only $5, doesn’t require the traditional nose swab, and can detect the presence of the virus in only 15 minutes. The U.S. Government entered into contract with Abbott for 150 million tests with the company anticipating shipping tens of millions of test kits in September. Both are great developments and should help bolster the economic reopening.
In closing, I’ve mentioned in passing that the pandemic would likely change the way companies operate. We’ve seen evidence of this over the past few months, but this week we have two pretty big ones. Ford announced that roughly 30,000 of its employees who work at the headquarters have returned to clear out their desks. However, this has nothing to do with layoffs, but instead for a future in which many, if not most, employees won’t come into the office every day. JPMorgan also announced this week it will rotate its employees between the office and home, giving them the ability to work remotely on a part-time basis. A recent survey of 30,000 North American workers found that more than 80% of people who were new to remote work said they want to keep working remotely at least part-time in the future. Now you know.
Bruce J. Mason, MBA