Tom Lee hosted a live webinar called "The Economic Reset" on May 1, 2020. He made some excellent points guided by Fundstrat's unique perspective through analytics and research. The following is part 1 of my summary of his hour-long presentation.
1. New bullish signal
Boeing's $25 billion bond offering on April 30 is a hugely bullish signal for the market. The initial plan of offering $10 billion was more than doubled to meet the surge in demand. According to Jim Casey, Global co-head of Investment Banking at J.P. Morgan, this was the largest bond deal in history that was not associated with a transaction. That Boeing is willing to pay 6% interest over the next 40 years with negligible current revenue from their 737 Max commercial jet business is very telling about how positively the company's management views their outlook.
2. When will the market bottom?
Lee explains there are three waves of bad news, and that intuitively, many investors project the market bottom to follow the red line in the below graph.
Graphic 1: From FS Insight - The Economic Reset webinar
However, Fundstrat's research makes the case that the market will follow the blue line. They believe the market has already bottomed on March 23, 2020, and that we are in the midst of a new period of equity value expansion.
When we look at past crises, and past recessions, the stock market always bottoms before the data bottoms...our Global Stategist Brian Rauscher thinks its even possible we get new highs this year - Tom Lee, Funstrat, May 1, 2020
3. Why is the market going up?
New daily COVID-19 infection rates appear to be going down
Tracking of daily new COVID-19 cases is not necessarily the best way to track the COVID-19 cases (Lee explained that values can vary based on regional breakouts, testing rates, serology), but Fundstrat believes regions reaching 75% off their daily highs is a real measure of progress. This would match what has been seen in Italy, in Germany, and in other counties that have re-opened. They believe that once more than half of all counties in the US reduce their daily infection rates to 75% of their highs, the crisis would be largely over.
My comments: Please note the above is a projection that is roughly 6-weeks old at time of writing, and reported by individuals with finance backgrounds. Infection rates now appear to be rising in many parts of the US. Always follow your regional health experts regarding personal safety.
GDP is down 40%, but it's overstating the damage to the economy
Even though the unemployment rate is at 20%, consumer confidence (with a baseline of 100 for comparison) is at 86, which is incredibly high.
I think the reason it's high is that the employment losses are overstating the income effects, remember it's the income that really matters to the consumer because that's the firepower we need when the economy revives, - Tom Lee, Fundstrat, May 1, 2020
To highlight the income effect, Lee identifies the twenty industries that shed the most in the March unemployment report. Those industries basically make up 90% of the report. Furthermore, the median income of the jobs lost is $35,402, yet it is only half of the US average. This is a major reason why the income effect of the US economy is much lower than anticipated.
The next chart shows the distribution of buying power in America. The bottom two quintiles have 11% of the total income of the country, but the top quintile controls 52%.
Graphic 2: From FS Insight - The Economic Reset webinar
While the top quintile took the largest employment losses during the great financial crisis, it's the bottom two quintiles have absorbed the most employment losses during the current COVID-19 crisis. That's why income is being preserved in the current market, and possibly why consumer confidence is high at the moment, despite the high unemployment rate.
My comments: It's important to note that many of the lowest-paying jobs are often held by African Americans, and other ethnic minorities. Black Lives Matter.
Please stay tuned for Part 2.
Thanks for reading, and stay safe!