As July comes to a close, amid the sultry summer here on the East Coast, the pace of life slows even in a regular year. People are at the beach, or in the mountains, getting a respite from the heat. This year’s heat seems especially oppressive, forcing people indoors, making the city seem even emptier. Throw in a little thing like a global health crisis and it’s enough to make you think you’re one of the last people on the planet. The loneliness thing is real, and there’s no doubt the mental health aspects of the COVID-19 crisis are understated, in my view.
Yes, more than 4 million people have contracted a virus that’s been crippling our country, and yes, more than 150,000 people have died here. Yesterday it was confirmed that the second quarter was the worst economic quarter for the United States since World War II. The economy shrank 32.9 percent. The national unemployment rate is 11.1 percent, and because of the recent surge in new cases in states that constitute 37 percent of our economy, the recovery seems to be stalling. These are terrible, terrible things.
But the consider this—what if this had occurred 20 years ago? Can you imagine what the country would have gone through without the technological breakthroughs to which we have grown accustomed in the last two decades? This may sound strange, but perhaps its time we thank our stars in heaven for the likes of Apple, Amazon, Google, Netflix and even Facebook.
We’re damn lucky.
Much has been written about the mesmerizing advance of the technology sector during the pandemic. While much of the economy has suffered dramatically, the mega-cap technology companies now exert dominance perhaps unrivalled in modern commerce. And of course, it’s reflected in their stock prices. Last night, Amazon, Apple and Facebook reported blowout earnings and the stocks are all up mid-single digits in percentage gains today. Amazon beat revenue expectations by $8 billion and reported EPS almost 7 times higher than what the Street was looking for, while spending $4 billion extra dealing with the coronavirus. Apple also blew past expectations and announced a 4-for-1 stock split. Facebook reported a monster quarter and the stock is up 7 percent today as I write this. Of the group, only Google, impacted by advertising softness, has declined today. Meanwhile, most U.S. stocks fell today because new jobless claims ticked higher for the first time in four months. Basically, today’s price action is 2020 in a nutshell for you. Tech is crushing it. Shall we raise a glass to our tech overlords?
While the outperformance of technology has drawn comparisons to the dotcom bubble, I do not believe this is even remotely the case. Sure, there’s probably more day trading going on now than is healthy given that there are no sporting events on which to gamble. E-Trade reported last week that it had seen more organic growth in the first six months of this year than in the last two years combined and more account growth than in the last five years combined.
Even so, I can tell you from personal experience that this is not the dotcom era. Broadly speaking, there were no tech earnings back then. There was no “E” with which to calculate a P/E. And the bigger difference, by far, is that tech is real now. It wasn’t then. After 9/11, I was stuck in my Manhattan apartment for months trying to upload equity research reports and otherwise communicate with my investment banking overlords using dial-up Internet. I was already deprived of my Palm Pilot because I’d left it in a taxi cab—remember those? Compare that experience to today. Once again, I have been forced out of my office for months by something horrific, but instead of watching out for envelopes filled with anthrax on the sidewalk while walking to the neighborhood Gristides for groceries, now I whip out my iPhone, for which I paid less than I did the Palm Pilot despite it literally being hundreds of thousands of times more powerful, tap in an order, and an Amazon van will bring me pretty much whatever I want in the world within a matter of a day, or less. Meanwhile, while I wait, I can waste an entire evening developing FOMO on social media, unwittingly marketing myself and all my friends to Mark Zuckerberg, who was all of 17 years old when the planes hit.
Yes, the market is a voting machine, but there is a reason why it is voting for FAANG.
The power of these companies makes some of us nervous, myself included, and it was just this week when their leadership was hauled in front of Congress so that politicians could yell at them for the cameras. But think about this—how many lives did Jeff Bezos save this year by enabling us to stay at home? Fifty thousand? One hundred thousand? Who knows? Could we have made it this far this year without iPhones? Or Google? Or Instagram? Or even Tiger King?
If you’re reading this, you are almost certainly one of the most fortunate people who has ever lived in human history. Even with the events of the last six months, the daily lives of most people who have savings to invest by and large represent the absolute vanguard of all of human experience. And just in case technology isn’t enough for you, you’ve got the Federal Reserve.
While perhaps it’s true that the financial markets seem remarkably sanguine in comparison to the overall economy, there are good reasons for that. First, the market reflects the federal government’s determination to keep financial conditions as loose as possible. This should come as a surprise to absolutely no one and there’s nothing new about this. The Fed’s role as market referee didn’t start with Jay Powell, or Alan Greenspan, or Paul Volcker; it started with Alexander Hamilton buying scrip in the Panic of 1791. Second, the markets reflect the health of the largest and most successful companies in the country. They do not directly represent the financial health of the American worker. Lastly, the market is a discounting machine. Everyone knows this year is a disaster. Nobody cares about earnings this year. Everyone is looking ahead to 2021 and even beyond, even more so as summer begins to fade into fall.
The market’s view seems to be that by next summer, most of us will be back to leading lives in ways that fairly closely resemble the way we lived before COVID-19. After all, most of the world is already operating under those conditions. Despite our missteps here, it seems we will muddle through somehow. The market is also suggesting to us that tech’s role in our lives will continue to grow. Is that really so hard to believe? And thank goodness!
The market’s volatility, as measured by the VIX index, has fallen more than 70 percent from its peak back in March. That’s a lot, suggesting that the biggest gains in this rally are behind us. However, volatility would have to drop still further to get back to pre-COVID levels, which seems to support the bull case, all else equal. Of course, as we have just seen, a lot can happen in six months. We could experience a second wave, or we could get a vaccine. There is a presidential election scheduled for November. But it would take a dark turn indeed for us to return to the dark days of mid-March.
There is work to be done to get America fully back on its feet. Is there anything more bullish than that? Somewhere out there is a 17-year-old with an idea that will improve our lives in unimaginable ways, or maybe even save them. I sure hope, for all our sakes, that he lives here.
“For suppose that you lived in that forest in France,
where the average young person just hasn’t a chance
to escape from the perilous pants-eating plants!
But your pants are safe! You’re a fortunate guy.
And you ought to be shouting, “How lucky am I!”
--Dr. Seuss, Did I Ever Tell You How Lucky You Are?
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