Reach Your Peak: New Beginnings
On what would be our founders’ most fateful day, we were called back to the United States of America.
Hunter, Eric, Kat, and I had just visited Barcelona and were set to relax in Marseille, France for the remainder of the week. On March 12th at approximately 3:00 AM, we hastily packed our bags, scared as to whether we would make it home in time before the borders were closed.
We rushed to the airport, buying the first tickets out of Marseille back to Dublin where we had all been studying and living together. After a quick landing, and a period of hyper-packing, we all split ways and entered quarantine for two weeks in the USA. While these two weeks were hellish, it tested the bounds of our new-founded friendship we had garnered while jet-setting abroad.
We recognized that the pandemic was infinitely larger than us and felt the harm it inflicted on our peers’ job prospects. Thus, we turned to investment research in terms we understand. The culmination of what followed is our aim to place complex investment research into the hands of everyone. With Kat & Matt at Georgetown, and us at Holy Cross, we could not be more thrilled to offer: “The Millennial Investor,” a magazine/periodical crafted by undergraduate and graduate students who hold a deep interest in capital markets. It is our goal to offer everyone, what Kat, Eric, Hunter, Hayden, and I did so well in Dublin: Finance Without the Bullsh*t. Check out what we think about the markets; we’ll be posting here every day and hope you check out our content.
The enactment of the Fed’s stress tests this year in the current macroeconomic environment pushes the limit. In the deliberations and determinations of what type of recession we are in, a lot of noise crowds out the important points. With the rolling out of extended quantitative easing by the Fed, it seems as if the market is impenetrable to any significant downside risk. Only until this past week have some of the companies with more than frothy valuations receive a pull back.
QUANTITATIVE EASING: the act of the Federal Reserve Bank pumping money into the economy
Nonetheless, it should be incredibly interesting to see how much banks are able to extend loans out during a time of historically low interest rates and historically high savings rates among consumers. The propensity of a second wave seems more likely despite a lot of refusal by investors to acknowledge that we are in fact in a recession.
The timing of the pandemic perhaps taints the macroeconomic landscape we are in. During the majority of first quarter earnings results, many companies were not negatively impacted by the situation. A lot of these risks were either never realized or written off for the second quarter. In fact, it is our opinion that a lot of the havoc that has been caused by COVID-19 will not be reflected into first quarter’s earnings reports until we are well underway to the temporary re-opening stage of the economy. We believe this will cause for sharp contraction in the economy forcing us into a W or extended V-Shape recovery.
When looking at the divergence amongst the Nasdaq composite, the S&P 500, and the DJIA, the paradigm shift in investing has clearly changed. Stocks within the Nasdaq now pay no or little attention to the fundamentals concerning an underlying business but validates the gifted momentum from the companies’ overblown technical indicators.
So where are we headed? I can and will tell you the various indicators that pertain to my belief in which capital markets by and large trend. For now, it seems a significant portion of the S&P 500 moves in step with COVID-19 case increases, increased mortality rates, and containment. Yet, this pertains to the stocks that are more cyclical to re-opening plans. Think of companies with brick & mortar retail space, such as restaurants and in-person entertainment venues. The equities that seem to buck this trend are the ones that have been thriving in an environment riddled with quarantine measures set forth by state and local governments.
Furthermore, some companies like Zoom, have built economic moats surrounding the pandemic and their efforts to retain market share in the post-pandemic world has proved formidable. It is now apparent to many employers that their employees can function 80% as efficiently working remotely as they could in person. When it comes down to comparing the cost per square foot and cost per Zoom license, I think the latter will be cheaper. Furthermore, it has led our investment process to include companies that have created new markets within this environment. That being said, it is our firm belief that because of trends like these, some stay at home stocks may be poised to grow further as the economy continues its path to recovery.
One of the items we are paying close attention to is the Federal Reserve’s Stress Test or C-CAR test on banks in the United States. The goal of these tests is to measure the liquidity of different banks, should they need to undergo financial stressors that are comparable to what unfolded in 2008. The test is two-fold, as of last year, and pertains to both quantitative and qualitative assessments of the financial Institutions Balance Sheets. This will either give banks the green-light for how they proceed with their shareholder and dividend distribution plans, or tell them they need to reallocate their assets to be more liquid in the event of high financial uncertainty. The test essentially determines if a bank is too levered to pay their shareholders a certain dividend or a buy-back of shares. As of writing this article the Dow remains lower with the financials being the out-performing sector of the day. It will be interesting to see how these firms fare in light of the current pandemic and more so the investor reaction to the sharp declines in asset prices.
*update—> 06/29/2020. Since the rollout of the Stress Tests, the Fed has requested that all companies revise their capital distribution plans in efforts to maintain stability in the Markets. Furthermore, Wells Fargo and Goldman Sachs are particularly trading down as their capital distribution plans were heavily updated.