Its a level headed explanation of the bull case though largely optimistic.
Effectively the market is making the following assumptions
- Reopening the economy is a good thing long term because;
- The risk of a relapse/higher infection rates and therefore re-shutdown is low
- Jobs that were lost will be quickly recovered
- Only leisure and entertainment were really hit by this, opening up will fix it
- High unemployment numbers will be quickly resolved because;
- A loss of jobs is only related to shutdown
- Opening back up the economy will return most people to these jobs
- Stocks like Netflix and Amazon have been beneficiaries of the COVID response - this will continue into long term increased profits for these companies and thus the market is up correctly.
- Central Governments will continue to provide stimulus into the economy
- Cost of borrowing will remain low
My BEAR case is as follows:
Prematurely opening the economy is going to lead to a material spike in infections. The American people appear to already be rejecting the lockdown as a good idea and think its gone of for long enough, they reject expert advice in favour of popular opinion (Trump/Musk etc). I would rate the odds of a 2nd wave to be
high, California is getting MORE cases per day rather than less and their testing is below the US average per million. Some states will be ok to re-open, but it's very dangerous for California to ease restrictions https://deadline.com/2020/05/southern-california-reopening-beaches-trails-restaurants-1202930591/
Unemployment numbers will solidify due to the 2nd wave. This has a raft of terrible implications on the market. The states does not have very much in the way of social welfare. Unless the FED intervenes again to provide a free cash injection those staff who have been just getting by (Furloughed) will be far worse off. The consequences of a very high unemployment rate over a 6 month period are widespread.
Even without a 2nd wave, job numbers will not spring back up to pre-lockdown levels for multiple years. The unemployment numbers will have come in large part from the tourism, leisure, entertainment and small businesses. While leisure and entertainment might quickly return, tourism likely will not and small businesses largely wont either. Many small businesses will be gone forever, and the influx of new small businesses will be very low. Who would start a business in this climate? So your natural job creation is hampered, your old jobs are
gone gone and it will take a sustained resolution to the COVID situation before those really come rushing back. How many Americans have enough money to survive a 3-6 month unemployment? What if that pushes out to 9-12 months?
Tech stocks revenue boom is already priced in - assuming unemployment numbers spike down quicky. Our tech darlings look unstoppable with many surging now to above pre-march levels - there is a locked in expectation that the likes of Facebook will have no material downturn in revenue over a 12-24 month period. I think this belies the flow on effects of mass unemployment. The markets are misunderstanding how much the lower-middle class drives consumption especially for companies like Apple. With many of this group impacted by unemployment (while Wall Street is sitting comfy) they have misunderstood what the medium-long term impacts to the economy will have on future earnings.
Increased revenue/sales due to COVID will continue once lockdown is lifted - I dont have a strong disagreement with this attitude but i think caution should be used, especially if unemployment remains high.
Cost of borrowing MAY remain low however, defaults could cause these rates to increase regardless of FED levels. If corporates/small business and retail borrowers are defaulting at a higher rate than previously, how could interest rates remain low? There is a direct correlation between default levels and the NIM banks earn at current interest rates. Either the banks will lift their rates, or they will see a loss in revenues/NIM. Given the way Wall Street protects its big banks I would say interest rates WILL GO UP.
Hope the above is of help or interest to anyone looking at BBUS. Please do consider ASICs advice at this time for retail investors. Do not buy the hype. It is better to miss out on gains by not betting on RED than risking more than you can afford on the chance it might be BLACK. Even if all the smart men and women are saying "RED FOR SURE!"
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