Being in the right stocks starting to matter more than being in stocks.
Much to the surprise of the bears, and to the confusion of much of the market commentators, the secular bull has somehow gotten itself off the floor of the arena, bloodied but not broken, and then, with a fierce roar, charged forward. Incredibly, we are now up almost 40% off the dark days of March 23’s low. At Federated Hermes, we’ve maintained our long-term bullish stance on stocks, though at times it’s been lonely to do so, and we often don’t look very smart backing an economy and market where new “historic” records of unemployment continue to be set. Though we acknowledge the next several months are going to be tough, with winners and losers emerging as creative destruction accelerates, we also believe the bull market will break through to new highs by late 2021 or early 2022. In the meantime, we continue to maintain a higher-than-normal equity position and focus energy on stock picking.
This said, we’ve been amused of late at the negativity about the economy and the markets coming out of the established press, and even with it, the business channels. Some of this is probably the politics of an election year, where unfortunately the opposition party, which includes many members of the press, benefits most if the economy tanks. Another force, though, is the normal outcome one gets after a big market plunge. The bear who has all the facts (behind him, at least) always appears more prudent and thoughtful, while the poor bull is left with his analysis of how he sees things working out in the future, how point A should lead to point B should lead to point C. All of this can seem speculative and simply hopeful, and thus less “intelligent.” Let’s face it, in dark times like these, the voice of the bear resonates more clearly with the worries and concerns all of us are grappling with. The bull can almost sound like a Pollyanna, a snake oil salesman.
This morning’s much anticipated April Jobs report presents a wonderful illustration. Within nanoseconds of its 8:30 release, the headlines were flashing across my screens: “Worst Jobs Report Since WWII” and “Economic Disaster Confirmed.” Quickly, I burrowed in to look at the data. I saw a very different picture, highlighted today by our own Phil Orlando in his weekly markets wrap piece: Jobs lost were incredibly high but actually 1.5 million less than the consensus feared. Importantly, manufacturing jobs lost were only about half of economists’ prediction. The unemployment rate, eye popping at 14.7%, was still considerably lower than feared. And much to the market’s surprise, average hourly earnings actually ROSE 4.7% month-over-month and 7.9% year-over-year. I repeat, R-O-S-E.
As Phil points out, the report gets even more interesting as you dig deeper. While the press keeps ranting about the millions of jobs “destroyed,” we’ve tried to point out that unlike past recessions, where jobs lost were ones from companies either going bust or severely and semi-permanently slimming down, this time around, many of the jobs “lost” could be more accurately described as “furloughed.” Furloughed, by the way, into the arms of the federal government’s significantly enhanced unemployment rolls. In fact, according to the April report, 90% of the jobs lost were described as “temporary” losses, not permanent ones. That is, most of these jobs, per the report, are expected to be reinstated once the economy comes back on line. Some of these won’t, for sure, but many will. For the headline writers, someone might think about this potential headline: “First Time in History: Virtually All of April’s Job Losses Were Temporary, Not Permanent.”
THE WINNERS AND LOSERS ARE BEING CULLED
Another optimistic note: the “market” rising in the face of weak economic numbers is in some measure a misread of what is really happening. In fact, beneath the covers, the “market” is actually doing a reasonable job, in our view, of beginning to distinguish the winners and losers that will emerge in the choppy recovery ahead. On average, this has caused “the market” to rise modestly (about 6%) over the past four weeks—following its fierce comeback once the Fed starting removing the meltdown scenario in March. But the path to this +6% return has hardly been uniform. Big winners, such as online retailer Amazon, cloud-beneficiary Google or stay-at-home and fix-the-house retailer Home Depot, are up 16%, 15% and 17%, respectively. And some “new economy” smaller names are up more; for instance, virus vaccine developer Moderna rose 79% in the last month as more good data came in on its new Covid vaccine. On the other hand, airline operator American Airlines is down another 21% off its previous 60% decline, with even the great sage Warren “Never Buy an Airline” Buffet throwing in the towel on airlines’ future, yet again. And mall-based department store Nordstrom’s tacked another -17% onto its earlier 48% decline as sales plummeted and the long-term outlook for mall-based retail darkened.
As hinted above, the fundamentals for the aforementioned winners have improved substantially over the last few months, while those for the losers have declined. Maybe the market isn’t as “dopey” as the commentators think. Maybe it’s actually starting to try to separate the winners from the losers, i.e., do what it’s supposed to do. What it hasn’t done much of late is follow the exchange-traded fund (ETF)/Index-driven world of rising tides lifting all boats. At Federated Hermes, our equity investment teams continue to focus on just this: finding and investing in what we believe to be the likely winners in the new post-Covid world, and avoiding the likely losers. “Don’t hug the benchmark,” our normal operating mode as active managers, has become our mantra. So far, it’s working. So as the market makes time in the months ahead, watch what is happening beneath the surface. A violent winners and losers game has emerged. More than ever, being in the right stocks will mean more than being in stocks.