Economic Growth Follows Lower Covid Cases

As the U.S. economy reopens, the Dow Jones Industrial Index roared back in the 2nd quarter with a gain of over 17%.  Due to extraordinary monetary and fiscal stimulus, the stock market led the true economic recovery by a wide margin.  The stock market has recovered over 2/3 of decline from the February high.  With expectations of a 4th stimulus plan in August and potential therapeutic and vaccine treatments before winter, the fundamentals and technicals look constructive for continued stock market recovery.  The fly in the ointment remains a potential resurgence of new Covid cases and how the U.S. deals with them.  

Figure 1 – Dow Jones Index recovers 2/3 of loss

The weight of the evidence remains constructive for the global economy but concerning for the U.S. economy.  Globally, countries are opening back up with stops and starts; home sales, auto sales and purchasing manager surveys are all constructive.  However, in the U.S., Covid cases are spiking and may result in localized lockdowns. PPP funds and extended unemployment benefits are running out in July and may force people to decrease consumption and/or look for new employment. In Europe and developed Asia, Covid cases are under better control and their economies will likely move to a higher level of output over the balance of the year. 

Consumer confidence seems to inversely trail the number of daily new Covid cases.  When the number of cases declines, consumer confidence and the economy improves.  However, since late June, Covid cases have rebounded to over 40,000 per day in the U.S. and may result in regional shutdowns.  This compares poorly to under 4,000 per day in the European Union and under 400 new cases per day in the China/Japan region.  It is likely that global growth will shift to regions with the lowest Covid cases.  Financial assets should follow. 

Figure 2-

Economic data from April, May, or June reflects a tremendous amount of churn occurring in the U.S. economy. States have been reopening, and now closing, at different speeds. Some businesses are coming back to life while many are still struggling, which means many employees are coming back to work as others are still getting furloughed. While June economic figures are expected to be improvements from April and May, the trajectory of the coronavirus through the U.S. and elsewhere is an ongoing concern, as the economy in different geographic locations may be shut down again as caseloads accelerate. With 31.7 million unemployed Americans (18% of the workforce), there is a large amount of uncertainty around any particular economic forecast right now.

Fed Chairman Powell and Treasury Secretary Mnuchin appeared before the House Financial Services Committee last week. Everyone is on the same page about the need for continued monetary stimulus and additional government support programs. Powell mentioned that he was surprised that the economy had begun rebounding so soon and with such strength. We fully expect Trump and Congress to agree on a substantial package to replace the Cares Act before it expires on July 31. Both the Fed and the government will remain “all in” well into 2022 no matter who is elected President in November.

Figure 3 – The U.S. Economy has a long way to recover

There has been, and will continue to be, a massive amount of fiscal and monetary policy stimulus. We expect the Fed and government to continue to supply huge amounts of monetary and fiscal stimulus which will support economy and financial markets pushing investors further out on the risk curve.  This opinion leads to a key investment thesis: “Don’t Fight the Fed!”

Quarantines and Masks Need to Become a Way of Life

The U.S. is operating from the false fatalistic assumption that Covid can only be stopped with a vaccine.  Other regions have proven this to be wrong.  The Asia region has had the most prior experience with viruses and has grown accustomed to a mask culture. They are worried about the “we” not the “me.” Their experience helped them get Covid under control in a rapid and efficient manner.  When you have only 20 new daily cases among 600 million people, there is complete confidence in sending your children to school, going back to work and shopping.  These economies open more quickly, and less government support is needed.  

Most developed countries (Europe, China, Japan) around the world have accomplished Covid containment successfully; the U.S. has not.  Currently, U.S. citizens are barred from visiting the European Union, Canada and even parts of Mexico until our new case count gets under control. I believe that this country-by-country divergence will affect the strength of economic recoveries around the world.  Getting new cases under control is a strong contributor to consumer and investor confidence.  Moving forward, the U.S. is likely to underperform in a global context as long as it lags in coronavirus containment.    

Looking to the Other Side of the Recession

The Covid Crisis has changed our way of life and will result in new stock market winners and losers.  Industries and companies will reinvent themselves.  Themes we expect to hear more of include: 

  • The internet of everything – Use of the internet after the crisis will not go back to pre-Covid usage. New apps and technologies are being invented for business meetings, social media, shopping, business, entertainment, healthcare, legal/accounting, gambling, sports, and many other functions and services.  Companies will be evaluated based upon the quality of their online experience.
  • 5G wireless technology – By 2021, 5G wireless service will start rolling out in cities around the world.  With a 100x improvement is speed, greater data capacity and lower lag, all sorts of new apps and services will be invented. New industries will be created by 5G.
  • Focus on Millennials – The big winners during the next ten years coming out of this panic are the millennials.  They don’t own much in common stocks.  Many millennials are bearing children and want to buy a new house, drive a minivan and shop at Target.  Historically low mortgage rates will help them find their consumer nirvana.  Millennial facing companies should succeed.
  • Increased home ownership – The U.S. is massively understocked with starter homes. The Covid crisis has motivated millennials to move out of cities and into suburbs.  Having more space is a big benefit when one works from home.  Mass intra-country migration should spread people into less crowded and significantly less expensive cities when this dawns on everyone.  We like homebuilder stocks.
  • Increased demand for healthcare – The coronavirus will expose the demand for universal healthcare.  The current insurance system has been widely exposed as unfair and unwieldy.  Stories of $1,000 Emergency Room visits, the unwieldy co-pay system and divergences of coverage are frequent.  People are likely to accept a broader social need for basic healthcare.  Healthcare spending is likely to rise and many providers will benefit.
  • Corona therapies – Last week we heard from Gilead (NASDAQ:GILD) that they will have over 500,000 doses of Remdesivir available by September and many millions by year end. We also know that Regeneron is making great progress in this area too. And the big news of the week came from Pfizer (NYSE:PFE) who unveiled promising and detailed data on a trial of one of its experimental COVID-19 vaccines.
  • Many business models are kaput – This recession has expedited the demise of many business models.  Between technology improvements and changes in consumer demand, many businesses must adapt or die. Many will not survive. 
  • Over-leveraged companies may go bustMany companies whose prospects were once favorable have been turned upside down by the coronavirus and need big financial packages to just make it to the other side of the recession.  Companies with a strong balance sheet will have a better chance of making it out of the recession.  Active mutual funds are more able to screen for strong balance sheets than index-based ETF’s.
  • Credit concerns abound – Dormitory bonds; Hospital bonds; Restaurant stocks; College tuition rates in an online world; Cruise ships; Stadiums are all suspect investments.  Bonds and stocks that support these businesses could suffer.  This is another reason for owning mutual funds vs. ETF’s when coming out of a recession. 
  • How much federal debt is enough? – As the Federal Reserve moved to QE infinity and the federal government deficit grows to 12%-15% of GDP, the credibility of U.S. debt may become suspect. Politicians are not good at such choices and the public does not yet care.  At some point, the bond markets are likely to react to a glut of global government debt and charge higher real rates of interest. 
  • Buy real estate and gold – Based on the debasement of the U.S. and global currencies, one should start to consider adding real estate and gold to one’s balance sheet.  We are seeing increased demand for assets that preserve purchasing power such as gold and bitcoin.  If timed well, real estate and gold may be a place for wealth preservation. 

After a spectacular 2Q, the U.S. equity market is likely to chop around for a quarter or two. My best guess is that the U.S. will consolidate while Asia and Europe improve. It is likely that the markets have largely priced-in a very grim 2020 and we are trading based upon expectations for 2021.  The impact of announced fiscal and monetary stimulus is astonishing and should hopefully create a path out of the recession in early 2021. 

Stock Market Tactics

Since Covid started in February, we have been very U.S. centric in our portfolio design. With the massive bounce-back rally, we believe it is time to diversify internationally with a focus on regions with lower new Covid cases.   The Asia region has the virus most under control with well under 400 new cases per day.   Europe is next with under 4,000 per day.  The U.S. is averaging over 40,000 new cases per day.  We believe that lower cases will result in increased consumer confidence and a more rapid economic recovery.  

Our investment strategies include:

  • We favor mutual funds over ETF’s.  We hope that active managers can screen out bad balance sheets and broken business models.  This screening process should lead to outperformance over the next year or two and be well worth the additional fund cost. 
  • We remain split between value and growth funds. While growth funds have led the recovery and are loved by Millennials, value funds have greater upside potential in the event of a real economic recovery.
  • Internationally, we favor the China region followed by European investments.  We are avoiding Latin America, India, Africa and Mexico.  
  • Based upon low inflation expectations and ongoing credit concerns, we have positioned bond portfolios in 4-6 year maturities with higher quality investments.  We would rather take risk in equities instead of bonds. 
  • We have been adding 5% gold positions to larger accounts. We are taking money from bond positions to fund these purchases.

Market leadership remains in growth stocks.  My best guess is that another round of stock selling could still be in front of us this summer but that it could lead to an interesting buying opportunity.  The goal is to come out of this recession fully invested in funds, ETF’s and industries that will be the new leaders for the next economic cycle.  



Scott P. Noyes, CFA CFP®, is the President of Noyes Capital Management®, LLC, an independent fee-only wealth management firm based in New Vernon, New Jersey. Please visit our website at


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