As I drive down empty streets past empty restaurants on the way to my empty office tower, I have frequently found myself asking, “How is anyone making any money these days?”. I have said this so many times this year that it has become a running joke between my colleague Cliff Stanton and me. I text him something along the lines of, “I just watched a football game with no fans. How is anyone making any money?” or, “Another 700,000 people lost their job last week. That sounds like over 50 million people at some point this year lost their job. How is anyone making any money?” To these texts, Cliff always replies, “People don’t make their money at work anymore – they make money in capital markets, dummy.” Oh, thank you for reminding me of how the economy now works.
And Cliff is correct: capital market prices are way, way up. November was a great two years, meaning investors could have earned upwards of two years’ worth of expected returns in some markets last month. The significant news: a resolution to the election and positive vaccine news (albeit skyrocketing COVID-19 cases). While the world wrestled with some form of renewed shutdowns, investors gave up on insisting that it is a bad thing. Europe, as an index, experienced what might be its best return in history – and this occurred while operating under economic shutdowns. In the logic of the new economy, bad news is considered good news, because the worse the economic news, the greater the likelihood of a bailout or stimulus.
Unlike in 2008 when stimulus and bailouts were so contentious that they helped propel both the Tea Party and the Occupy Wall Street movements, this time around it’s all in, with all in. How many times this year have we heard the comment, “The market drifted sideways today as talks of further stimulus stalled?” The common belief is that stimulus and bailouts lead to higher asset prices. But, this time around, the term “moral hazard” hasn’t even been uttered.
Yet, there is something quite unique about COVID-19 that has not only caused investors to react in an extremely bullish manner and has also made consumers blow up their wallets. And just like the pandemic itself, the consumer reaction, too, is a global phenomenon. Buried deep in the Factset S&P 500® earnings report is this nugget: “If the Hotels, Restaurants, & Leisure industry were excluded, the Consumer Discretionary sector would be reporting year-over-year earnings growth of 36.0% for the third quarter…. The other seven industries in this sector are reporting double-digit (year-over-year) earnings growth, led by the Automobiles (74%), Multiline Retail (65%), and Internet & Direct Marketing Retail (45%) industries.”
Wait, what?
That is staggering earnings growth due to consumer spending! While consumers may or may not be making money at work, they sure are spending it.
For most industries and sectors, corporate earnings are excellent[1].
It is remarkable how well the global economy has performed in the face of all that unfolded this year. I am not sure that we can simply credit consumer spending and rising asset prices to just the Fed or the bailouts. Instead, it could well be viewed as a true testament to the strength of the global economy and the will of investors and consumers. It’s almost as if investors and consumers fought their way out of the economic hole. Our main complaint way back in 2019 was that asset prices were rising rapidly in the face of a generally slowing economic backdrop and stagnating asset class earnings. Then along came COVID-19, which in itself caused a stimulus-like reaction. It’s almost as if COVID-19 was the stimulus that the global economy needed to kickstart it.
Now that is one weird statement.
Is this universal bullish reaction the last gasp of how investors “want” the world to work? Or did we bridge the economic hole with pure willpower? Now that the tide of asset prices is high and we have kickstarted a new era, are there smooth seas ahead?
For now, the will of investors has spoken, and that will was to lift the capital markets – or what I call “to fiercely defend asset prices.” So far, so good. Consumers are spending like never before, earnings reflect the spending, and the phenomenon is global. A bridge over the giant economic hole from earlier this year has not only been crossed, but we whistled and danced along the way. If I were to be a misanthrope and scratch at the scab of the way things should be, I might harp on such a question as, ”If not under the conditions of this year, what would cause investors or consumers to ever be cautious again? Maybe there simply isn’t any more risk involved in investing.”
But for now, grant me the serenity to accept the way things are. After all, the way things are is quite remarkable and the economic outcome of the year simply couldn’t have been any better.
