10-15 Associates

The Great Reversal

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It has been seven weeks and counting since Governor Cuomo announced the closure of New York, except for essential workers. The news was announced late on a Friday afternoon and was to be effective that Sunday evening. Consumers quickly took to the roads to stock up on the essentials for their families. Not knowing the duration of the shutdown, buying quickly turned into panic buying as store shelves were quickly emptied of everything from meat and produce to cleaning supplies and toilet paper. His words now ring true as we all still wonder when and what normal life will look like. In his statement he noted, “There are people and places in New York City where it looks like life as usual. No, this is not life as usual. Accept it. Realize it and deal with it.” As states across the country begin to open and we wait to watch and see what happens, markets continue to climb that wall of worry.

At the close of April, the S&P 500 was up 12.68% for the month and now down just 9.85% for the year. The Dow Jones Industrial Average has seen similar results, climbing 11.08% for the month and down 14.69% year to date. The technology heavy Nasdaq charged back 15.45% to come within .93% of breaking even for the year. Interest rates continue to decline, and the epicenter of the pandemic played itself out in the energy markets. The fact that oil is down over 60% for the year does not demonstrate just how volatile these markets have been. On Monday, April 20th, West Texas Intermediate (WTI) crude oil front month futures traded in negative dollars for the first time since trading began in 1983. By late in the afternoon, WTI traded as low as -$40.32/barrel. With storage facilities at or near full, markets appeared to be “broken.” By the close of the month, WTI had made its way back to $18.84. The impact of oil prices was evident in the earnings announcements when management at Royal Dutch Shell had to make the hard decision to cut their dividend. It was the first time since World War II that the company had to take that action. It may therefore be surprising that although oil is the worst performing sector for the year, it was the best performing sector in April finishing the month up 29.66%. This is important to note as markets typically anticipate the recovery and stocks rebound in advance of the actual recovery.

Understanding just how great the shock has been to some of the hardest hit industries, there are not many more telling than the airlines. The Easter weekend is one of the travel industries’ biggest travel weekends. According to the TSA, the three-day period of April 10th through April 12th, Good Friday through Easter Sunday, they processed 293,152 travelers in the United States. The same three-day period last year they processed 7,096,442. A recent article in the Wall Street Journal mentioned a Jet Blue flight that flew from New York to Albuquerque, New Mexico, with only 7 passengers on board. When asked why they did not cancel the flight, the spokesperson for Jet Blue said that all six passengers were medical professionals that had traveled to New York to help with the coronavirus pandemic. As the airlines scramble to ground as many flights as possible, they are caught between making unprofitable flights and serving their customers. The president of network strategy for American Airlines said, “As strange as this sounds, now our obligation to our customers has actually never been more important and unfortunately, never less profitable.” On a typical day prior to the coronavirus there were 400 flights departing from Newark, that number currently is about 16. It took 6 years for the airline industry to recover after 9/11, it was nowhere near as devastating as this and airline industry experts have no way of determining how long this will take to recover from. Airline stocks have yet to see the recovery in the month of April. If we look at Delta and United, they were flat to down for the month.

With an estimated 30 million people unemployed and the recent GDP number revealing that consumer spending had declined more than expected, retailers are feeling the pain. For an already beleaguered sector trying to adapt to the online consumer, those with massive square footage sitting empty are finding it difficult to survive. Neiman Marcus Group and The Gap both filed for bankruptcy protection during the month of April. They are not the only ones and unfortunately will not be the last. Department stores currently represent about 60% of the anchor space in malls today, according to Green Street Advisors. They estimate that more than 50% of the department stores anchoring America’s malls are going to permanently close by the end of next year. There are still over 1000 malls still open in the U.S. today and roughly 60% of those have department store retailers. It is unclear what the mall of the future will look like, but it is becoming clear that there will likely be fewer of the familiar name brands flanking the walkways. Contrary to what you may think this news would mean to stocks, the consumer discretionary sector, representing names such as Target, Home Depot and Nike, was the second-best performing sector in April, gaining 20.51%. Once again markets are telling us that although the news is bad and the industry will have some failures, consumers will come back.

Technology has been the alter ego of the casualties of the coronavirus. We have at times complained about the “always connected” world we live in today and the prevalence of technology in everything we do. We have a generation that has grown up with a new language and a new way of living, learning, and communicating. Without technology we would be witnessing something much worse and much more severe to our way of life than what we are seeing today. The ability of companies to send millions of their employees’ home and armed with all they need to continue to perform their job, has changed the trajectory of this pandemic in a way that we cannot quantify. Markets understood this very quickly and money rotated to those names that are supporting our new normal, from companies like Apple and Microsoft to Zoom and Walmart. I put Walmart in this category because they had the foresight to invest heavily in technology, to not just be one of the world’s largest retailers but one of the largest online retailers with the ability to modify their supply chain even under the direst circumstances. These companies today all trade near their 52-week high and the technology sector as of today, has turned positive on the year.

We are a long way from understanding this virus, and more importantly a very long way from understanding the long-term impact of it. Markets have seemingly taken the advice of Cuomo and have accepted it and are dealing with it. Our personal perspective locked away in our homes, separated from the ones we love, missing out on some of life’s most precious moments, and uncertainty about the future, makes it difficult to look forward to the other side. This past month, markets have told us that brighter days do lie ahead!

Our staff remains healthy and over the last several weeks have proved to us what an extraordinary group of individuals they are! We hope you all remain healthy and stay safe!

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