“There came into Egypt a pharaoh who did not know.”
--Carl Fox, Wall Street, 1987
It’s 7:42 a.m., and I’m staring out the sunroom window at a large dogwood tree. The tree’s blossoms have mostly fallen away at this point, and the azalea bush right behind the dogwood, while still pink, is starting to look dusty.
I’ve been staring out of this window now for more than one year.
Last year at this time, as I wondered how in the world anyone could possibly be expected to stay at home through Memorial Day, this view provided me with the first glimmer of hope that not only would I not go out of my mind but that the world would continue to turn. I remember writing in these pages, “Who knew pandemics were so beautiful?”
With the CDC guidelines released yesterday that the fully vaccinated may now move about in public outdoor spaces without face coverings, the world seems to be turning indeed. Sure, lots of people were already doing this, but it’s hard not to interpret this as a giant leap back toward pre-pandemic life in the United States. Soon, I’m not going to be staring out of this window anymore. And while I do not intend to forget how fortunate I have been to spend a year working in a lovely little home with three people I love and a dog that I generally like, it is time to go back. It’s time for COVID-19 to let our people go.
And go we will.
More than 95 million people in the U.S. are fully vaccinated, close to 30 percent of the population, and 140 million have received at least one dose. The 14-day rolling average of new COVID-19 cases in the U.S. is down 24 percent, and the number of new deaths is down 5 percent. The rate of vaccination, which reached the astonishing level of 3.38 million doses per day on April 13, has even eased about 20 percent to 2.27 million per day.
The feeling I had driving two hours back from tiny Windsor, NC, where I received my vaccinations, was one I do not believe I will soon forget. The feeling was two parts elation, one part humility, and a pinch of good old Presbyterian guilt for good measure. If I was predestined to receive the vaccine, it sure didn’t feel that way; it felt more like the dog might feel if it ever caught a rabbit. I have a feeling that literally millions of people are going through the same set of emotions, and I also have a feeling the guilt is going to pass. Big time.
I feel like a gladiator before being released into the arena—okay, maybe I’m about to have my head split open, but all I can think of is getting out of this dungeon. Or maybe this is what Mick Jagger feels like when he’s about to walk out onto the stage at Wembley. Maybe the Israelites felt this way when they arrived safely at the other side of the Red Sea. At any rate, I can definitely say that this is what a middle-aged square feels like when he’s daydreaming about doing cool things again.
And if this is the way a middle-aged man feels, what of younger people? Well, I can tell you. I have a son who, on pandemic time, was just weeks away from completing his Eagle Scout, something he had worked towards, albeit in fits and starts, for years. But his high school unexpectedly reopened a few weeks ago, and the track team, of which he is a captain, is now scheduled for a full season. Suddenly, he is able to see his friends again, including one of the female persuasion. He tearfully announced to his parents that he was not going to finish his Eagle because he could not bear to miss any more time away from school these last four weeks of his senior year, and you know what? While I’m disappointed, I can’t even blame him. What young person should be asked to sacrifice one more nanosecond? (What I have not yet told him is that while nobody should have to sacrifice his junior and senior years in high school, I would be willing to bet a cold Rolling Rock that his college experience, starting in August, is likely going to be one for the ages…)
These situations are playing out all over the country at this very moment, and with luck and some more work, it will be playing out all over the world. Frankly, I think what is taking place now is shaping up to be potentially the greatest economy of my lifetime. It could well be one of the great social and economic booms in the history of the United States—the land of milk and honey.
Consider these as you stare out the nearest sunroom window:
The U.S. unemployment rate, which stood at 14.8 percent in April 2020, was at just 6 percent last month, below the 50-year average. The economy has regained about 63 percent of the jobs lost between February and April last year and seems poised to strengthen further. The price of oil, which bottomed last April at $11.57 per barrel, was $62.94 yesterday. Global GDP growth this year is expected to clock in at 6.6 percent, a historically high number, and another 4.5 percent next year, which itself would be the best growth year in more than two decades. Corporate earnings in the U.S. are expected to grow 26 percent this year. Finally, there’s the matter of $1.9 trillion in government stimulus that’s coming soon to an economy near you. This has stoked some fears of rising inflation, but these fears must be balanced against the massively deflationary forces that prompted the passage of the package in the first place.
Markets are largely efficient, even if not perfectly efficient. Interest rates have begun to rise to reflect the strengthening economy. The ten-year Treasury yield, which was at 52 basis points in August, was 1.63 percent yesterday. That’s an eye-popping move, but that’s also still a historically low yield. For perspective, the ten-year was still above 3 percent at the end of 2013. Low rates provide support for historically high asset prices, one reason why the S&P 500 now trades at 22.5x forward earnings. That’s not exactly a bargain-basement price, but it’s nowhere near expensive compared to the bond market. Compared to bonds, the prices of which of course fluctuate with interest rates, the equity markets are nowhere near where they were in the dotcom era, which is the last time I personally witnessed this kind of euphoria now associated with some pockets of the overall market. As of yesterday, April 27, the ten-year treasury yield when adjusted for inflation, was still slightly negative.
It’s just not that difficult to be bullish on asset prices right now.
Even so, as we were reminded last year, the economy and the markets are not necessarily the same thing, at least in the near term. In 2020, we had an economy right out of the Old Testament and yet had a market that was straight up New Testament/John Lennon “All You Need Is Love.” It’s perhaps rarer to have a booming economy and a lousy market, but it can happen. There’s a certain reflexivity to the market’s interplay with the economy. Excesses of one feed into the other, and what starts out as make-believe (Tesla and Dogecoin, for example) begin to create real-world wealth, at least on what was once known as “paper.” What to watch for is an economy that is cooling, even if from a great heat. It won’t take long for the great discounting machine to work that out.
One can argue that these new market highs do not represent the top of the market but it is decidedly more difficult to argue that we are near the bottom.
Setting aside the interest rate question, historically when the S&P 500 is at 22.5x earnings, forward returns have not been particularly robust.
So, as the horror of COVID-19 begins to recede, those of you who were paying attention in Sunday School all those years ago might recall that even though the Israelites escaped the dreaded pharaoh, that wasn’t the end of the story. They then wandered 40 years in the wilderness, grumbling and complaining about their boss. The Israelites forgot the patience, fortitude and faith in each other that got them there.
Of course, forgetfulness and myopia were not traits unique to the Israelites in the story. As Bud Fox’s father Carl said to the corporate raider Gordon Gekko in the 1987 film Wall Street, paraphrasing Exodus 1:8, it was the pharaoh’s failure to remember how Joseph had saved Egypt from famine that led to enslavement the Israelites. Joseph, whose advice to take advantage of the forecast of seven years of plenty and prepare for seven years of famine, was forgotten over time, just as Gekko ignored the little people of Blue Star Airlines to his great detriment.
This is not a forecast for seven years of famine anytime soon. Virtually all economic data coming down the pike suggests plenty for as far as the eye can see, and beyond. But again, the collective intelligence of the market will ferret out any softening in the forecast long before the average Israelite or even the average pharaoh. Turns out things weren’t different that time even when frogs and locusts were falling from the sky, or when a pandemic spread throughout the world. This is just me saying don’t be greedy when everybody is being greedy.
There’s another prominent forecaster who lives in Omaha who’s fond of saying he’s a lot better at predicting what’s going to happen than when it’s going to happen.
For what it’s worth, I believe we are poised to go through a period of extraordinary growth and plenty. And it cannot get here soon enough. Soon it will be time to move on from my view of the dogwood tree. I cannot imagine I will forget it, or forget the way I felt driving back from Windsor, but hey, that’s what people do.
I have been living in what I call “The House Full Of Hamlets” for more than one year. Every creature inside, including the dog, has been brooding to beat the Prince of Denmark himself. We’ve all been brooding, and mulling, and thinking, and hoping. When will the pandemic end? What will we do then? Will I have the same friends? How can that rabbit be that fast? Where will I go to college? Does the girl like me? Should we move? What will work be like?
Well, we are all about to find out the answers to those questions in a short while indeed. Let’s just not forget the lessons of the past year, and the past in general.
In the manner of Carl Fox, I’d like to conclude this late April letter by paraphrasing and otherwise adapting an old Presbyterian benediction:
Go out into the world in peace. Have courage! Hold fast to what is good. Return no one evil for evil. Strengthen the faint-hearted, support the weak, help the suffering. Honor all people. Keep your eye on the yield curve, and beware of geeks bearing formulas. And go see about a girl.
Any opinions are those of Burke Koonce and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Burke Koonce is a financial advisor at Raymond James & Associates, Inc., member New York Stock Exchange, member SIPC. www.raymondjames.com/burkekoonce