Welcome to A Brighter Future

Welcome to A Brighter Future

The Laidlaw Podcast Series where we discuss relevant and timely financial matters with leading experts in the field.

Discussions With David Garrity

In this ongoing series of interviews, renowned market strategist David Garrity and Richard Calhoun, CEO of Laidlaw Wealth Management discuss the 2020 market forecast and offer invaluable insights into the capital markets in light of current events and the resulting unprecedented volatility.

June 15, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, recaps the markets and discusses the investment outlook with Laidlaw & Company Chief Market strategist, David Garrity. The topics discussed in this episode are macro level issues such as how stock market volatility signals need for further fiscal & monetary relief, Fed Chair Powell’s Humphrey-Hawkins testimony to Congress, prospects for the new bull market, how COVID crisis recovery may involve infrastructure spending and whether globalization has ended. 

READ TRANSCRIPT

In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, recaps the markets and discusses the investment outlook with Laidlaw & Company Chief Market strategist, David Garrity. The topics discussed in this episode are macro level issues such as how stock market volatility signals need for further fiscal & monetary relief, Fed Chair Powell’s Humphrey-Hawkins testimony to Congress, prospects for the new bull market, how COVID crisis recovery may involve infrastructure spending and whether globalization has ended. 

Please tune in for more timely insights.

Episode Title: To Fuel The New Bull Market, Congress Should Turn Towards Low-Carbon Infrastructure Spending.

Hashtags & Stock Symbols: #StockMarket #Economy #ClimateChange #SP500 $IVW $IWD

SCRIPT:

Hello and welcome to another episode of “A Brighter Future”, Laidlaw & Co’s Podcast Series.  I’m Rick Calhoun CEO of Laidlaw Wealth Management and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co. 

David, great to be with you again after another eventful and volatile week in the markets.  So let’s get into it.  

 

Question One 

Last week, we saw stocks log their worst weekly declines since March as fears of a second wave of infections and doubts about a speedy economic recovery dampened investor sentiment.  The Federal Reserve indicated that rates are likely to remain near zero until 2022 and issued a cautious economic outlook.  The Fed’s cautious tone, in combination with news of an acceleration in new infections and hospitalizations in certain states as well as concerns about the speed of the rebound in stocks, triggered some profit-taking.  So, was it just that, David, profit-taking after a great run from the lows or should we be worried?    

Rick, Despite last Thursday’s violent -5.9% sell-off in underwhelmed reaction to Fed Chair Jay Powell’s press conference on Wednesday afternoon, the S&P 500 index at 3,041.31 closed the week and is still up +35.9% from the March 23rd low, although with a decided tilt towards Growth (ticker IVW $200.78, +39.9% vs. 3/23/20) over Value (ticker IVE $109.19, +31.6%) as the broader global macroeconomy remains plagued by the COVID-19 Coronavirus (“COVID”) pandemic.  This still leaves room for a further -5% correction from current levels to trade in the 2,800-3,000 range considered “fair value” for the S&P 500. 

Apart from profit-taking spurred by Powell’s tentative remarks, the news of renewed COVID outbreaks globally along with rising civic unrest, the fact that last week saw the return of the “-5% daily move” in the S&P 500 index prompts a quick review of the significance of this kind of volatility. 

Since it was formed in 1957 the S&P 500 index has had only 27 days when it has fallen by -5% or worse.  As the average daily change in the S&P 500 index is less than 1%, this indicates that a move of -5% or worse in a single day lies more than 5 standard deviations (“sigma”) from the average.  Based on the principles of probability, such a move should only occur once every few thousand years or so, not something that can or should be attributed to normal profit-taking.

Over the span of the S&P 500 index’s history, the greatest cluster of “-5% daily moves” was 12 days during the Financial Crisis & Great Recession of 2008-2009.  With the Thursday 6/11/20 decline marking the 5th day of such negative volatility during the current downturn, the COVID crisis is now ranked #2 in terms of equity market volatility. So, what does this all mean?

To our view, such volatility is a clear and unequivocal signal that government fiscal and monetary policy is lagging economic reality, something that is troubling as one might expect with a general election less than 6 months from now that politicians would rather put themselves ahead of the curve than to run so disastrously behind it. 

While there have been and still are hopes for a “V-shaped” recovery (e.g. see Morgan Stanley on the side of the “V-shaped” recovery, J.P. Morgan on the side of something more modest), the evidence is that until such time as consumers feel economically secure and physically safe the pace of recovery will be measured.  Consequently, time for Congress to stop dithering and get on the ball in passing the next fiscal COVID relief package.  As it is, with November fast approaching, their jobs are at stake.  

Question Two 

David, not a week has gone by since the beginning of this pandemic where we have not discussed the Fed in some way.  Last week, many felt that Thursday’s “sell off” was directly related to Federal Reserve Chairman Powell’s comments in his Post FOMC Press Conference. 

Powell essentially said: The economy is a disaster and we don’t see any signs of an imminent rebound, but the Fed will be here to do whatever it takes to support the economy until it gets better.  Which to me says the “Fed Put” is in play and reminds me of your past comments of the Fed (and the trend) is your friend.  What is more worrisome though,  is that the FOMC and Powell made virtually zero mention of a sustainable economic rebound.   

What are your thoughts from a Macro perspective on how we can achieve that sustainable economic rebound? 

Rick, When the COVID crisis is finally resolved, I fully expect there will be a re-make of the 1999 film “Being John Malkovich”, but this time it will be titled “Being Jay Powell” as clearly everyone is trying to get inside the mind of the Fed Chairman. Meanwhile, your guess on which actor will be cast for the leading role is as good as mine. 

That said, Jay Powell this week has the opportunity to clarify his macroeconomic thoughts not only once, but twice, as part of the semi-annual Humphrey-Hawkins testimony before Congress on Tuesday 6/16 and Wednesday 6/17 in which he will explicate the Federal Reserve’s Monetary Policy Report that was submitted last Friday. So, stay tuned on this front for Jay Powell to have the chance to be more definitive in his words regarding the macroeconomic outlook.

Meanwhile, with the Federal Reserve acting to back-stop the credit markets and so helping to tighten the spreads over Treasuries for investment grade (IG) and high-yield (HY) issues, last week did see something of a reversal as spreads widened out a bit. Nevertheless, corporate bond spreads were more resilient than stocks during Thursday’s risk asset selloff. Although so far in June the S&P 500 is lower, IG spreads remain lower by 17 basis points and HY by 14 basis points as of Thursday. 

What may be interesting in Jay Powell’s upcoming testimony, among other topics, is the possibility the question may be posed of whether the Fed has considered extending support to the equity market. Equities don’t have that backstop now and last Thursday was a 5-sigma down day. Bonds do have the Fed back-stop, so while spreads widened last week, fixed income price action was nowhere near as dramatic as what was seen in stocks. Just saying.

Meanwhile, for thoughts on ways in which to achieve a more sustainable economic rebound we offer some fiscal policy considerations later in the discussion in the context of considering not just recovering from COVID, but in putting in place the energy infrastructure needed to transition to a less carbon-intensive economy.

Question Three

David, let’s turn our attention back to the markets.  Last Thursday’s -1,800-point drop in the Dow brought back memories of the dramatic swings that were prevalent through February and March. Although the market declined -5% last week, it should not be lost that it is still +36% higher since late March and just -10% from its all-time high.  I did a little homework this weekend and history shows that the initial stages of new bull markets are typically characterized by strong gains.

 

Stock Market Performance

Bear market low 1 month 3 months 12 months
1974 19% 13% 38%
1982 19% 36% 58%
1987 14% 19% 23%
2002 14% 19% 34%
2009 27% 39% 68%
2020 25% 36%* ?
Source: Bloomberg, S&P 500 price return. *3/23/20-6/12/20. Past performance is not a guarantee of future results

According to Bloomberg, in the postwar era, every instance in which the stock market rose more than +30% from a bear market low turned out to be the beginning of a new bull market. So, in your opinion, could this be the beginning of a new Bull Market?

Rick, From the standpoint of textbook definition, any -20% retrenchment, or bear market, offers the chance to bring about a new bull market. With the S&P 500 index falling -33.9% from the high on 2/19/20 to the low on 3/23/20, the first condition of having a bear market has been met. Also, as you indicate, the +35.9% return from the low does show the second condition for the consideration of a new bull market has been met. 

However, given the tsunami of liquidity that has been unleashed as governments around the world have sought to mitigate the impact of the COVID pandemic, is it fair to say that this a bull market as its economic underpinnings are uncertain and the possibility that at some point the relief injected will likely be withdrawn?  Such circumstances could just as easily be termed an asset bubble wherein expectations have been floated while the economy remains on the rocks.  

Nevertheless, I am inclined to see that we are indeed in a new bull market, but one that will need to find its footing and as such is likely to be more of a grind higher from here than a continuation of the rocket ride from the March 2020 lows. 

In this context, it may be best for investors first to build core positions in solid Growth names prior to expanding into more economically exposed Value names until the desired firmer economic footing becomes clearer.

Growth vs. Value: Performance from 2/19/20 Peak  
         
  2/19 – 3/23 3/23 – 6/12 2/19 – 6/12 Recover %
Index Change % Change % Change % Of Peak
S&P500 -33.9% 35.9% -10.2% 89.8%
S&P500 Growth -31.4% 38.9% -4.7% 95.3%
S&P500 Value -36.8% 31.6% -16.9% 83.1%
Growth less Value 5.5% 7.3% 12.2% 12.2%
         
Russell 1000 (R1K) -34.7% 37.4% -10.3% 89.7%
R1K Growth -31.5% 40.3% -4.0% 96.0%
R1K Value -38.4% 34.0% -17.4% 82.6%
Growth less Value 6.8% 6.3% 13.4% 13.4%
         
Russell 2000 (R2K) -40.8% 38.4% -18.0% 82.0%
R2K Growth -38.5% 41.9% -12.8% 87.2%
R2K Value -43.1% 34.1% -23.7% 76.3%
Growth less Value 4.6% 7.8% 10.9% 10.9%

Question 4

David, there is a quote attributed to Aristotle – 

“It is the mark of an educated mind to be able to entertain a thought without accepting it.” 

I mention that because I recently read the headline, “Renewables surpass coal in U.S. energy generation for first time in 130 years.” 

The headline, while impressive, gave the impression that renewables had made a large, unexpected, leap forward versus coal and other fossil fuels.  Globally, our lives revolve around energy use, and lots of it.  Fossil fuels (such as coal, oil, and natural gas) generate most of that energy today.  Recent progress in renewables (like wind, solar, and hydropower) has been made, and I have no doubt that renewables are the future.  But do you see fossil fuel use on the verge of collapsing?  

Rick, While there was certainly a great deal of furor and speculation around the oil price crash and OPEC+ production cut pact earlier this year and the commodity’s subsequent price rebound, gasoline demand is beginning to recover in part due to people deciding to drive their own cars rather than run the risk of COVID infection by taking public transportation and, no, fossil fuel use is not collapsing.  Note that in 2019 global oil consumption was running at a rate of roughly 100mm barrels per day, not something that is about to disappear overnight. 

However, there is an opportunity in the COVID crisis to stimulate economic growth by public and private sector investment in climate-friendly infrastructure that will serve to create new jobs and position the global economy to address the longer run challenge of climate change. 

Note that neither COVID nor greenhouse gases care much for borders, something that makes both challenges global.  Furthermore, the two crises do not just resemble each other, they interact as shutting down the global economy has led to huge cuts in greenhouse-gas emissions.  However, on a global basis, there is still more than 90% of the necessary decarbonization left to do to get on track for the Paris Agreement goal of a +1.5 degree Celsius increase in temperature levels.

This leaves open a significant opportunity to not only stimulate economic growth, put in place pricing and tax frameworks to promote the use of less carbon-intensive energy sources and produce the revenues necessary to pay for the fiscal stimulus employed to offset COVID. In this way, policy can be both penny-wise in the short-term and avoid being pound-foolish by not taking advantage of currently lower opportunity costs to put the global economy’s energy infrastructure on better footing climate-wise for the long term.  

Question 5 

David, as we near the end of today’s episode I’m interested in your thoughts on the pandemics effect on Globalization.  

We are now seeing that the fallout from the coronavirus pandemic has capped growing disenchantment with globalization that we have observed over the past decade.  Fragile supply chains worldwide have been exposed by competition for essential medical and food supplies.  Unilateral export controls have been imposed to ensure availability of goods for the local market.  That has compounded the pandemic’s damaging economic effects, atop the human tragedy, adding to protectionist pressures to sustain U.S. living standards. 

Recent developments follow a long “hollowing out” of manufacturing and loss of high-paying blue-collar jobs, aggravating politically sensitive income inequality in the U.S. and abroad. Even The Economist sounded globalization’s death knell in a recent cover story referring to as Slowbalization!!  

David, could the pandemic’s economic and human toll bring an end to globalization?

Rick, While there was already consideration of the need to re-engineer supply chains away from following the strict rule of finding the lowest price available, something in part prompted by the U.S.-China trade war, the impact of COVID has been to accelerate the implementation of these nascent plans into action. 

Companies are learning from the COVID crisis to insure themselves against supply chain disruption through steps such as having at least two suppliers of every component or raw material.  Until now, logistics and supply chains may have been very fragmented and very vulnerable since the overriding goal of finding the cheapest global provider led companies to overlook the value of the provider who was just around the corner.

Yet it is not just supply chains that are being reconfigured, it is the entire social and political economy that has been underpinned by globalization.  As the world reopens from COVID, activity may recover, but we cannot expect unfettered movement and free trade to return.  As can be seen, COVID is politicizing travel and migration and entrenching a bias towards self-reliance.  To our view, this process of turning inward will undermine the economic recovery and thereby likely promote geopolitical instability.Consequently, it is critical for efforts to be made to reach an over-arching consensus to support an open global economy or face costs that may be greater than simply having to pay a higher price for imported products.  To find a way forward from COVID, I believe it better to have agreement around resilience than a divided self-reliance. As Ben Franklin once said, “We must, indeed, all hang together or, most assuredly, we shall all hang separately.”

June 15, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, recaps the markets and discusses the investment outlook with Laidlaw & Company Chief Market strategist, David Garrity. The topics discussed in this episode are macro level issues such as how stock market volatility signals need for further fiscal & monetary relief, Fed Chair Powell’s Humphrey-Hawkins testimony to Congress, prospects for the new bull market, how COVID crisis recovery may involve infrastructure spending and whether globalization has ended. 

READ TRANSCRIPT

In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, recaps the markets and discusses the investment outlook with Laidlaw & Company Chief Market strategist, David Garrity. The topics discussed in this episode are macro level issues such as how stock market volatility signals need for further fiscal & monetary relief, Fed Chair Powell’s Humphrey-Hawkins testimony to Congress, prospects for the new bull market, how COVID crisis recovery may involve infrastructure spending and whether globalization has ended. 

Please tune in for more timely insights.

Episode Title: To Fuel The New Bull Market, Congress Should Turn Towards Low-Carbon Infrastructure Spending.

Hashtags & Stock Symbols: #StockMarket #Economy #ClimateChange #SP500 $IVW $IWD

SCRIPT:

Hello and welcome to another episode of “A Brighter Future”, Laidlaw & Co’s Podcast Series.  I’m Rick Calhoun CEO of Laidlaw Wealth Management and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co. 

David, great to be with you again after another eventful and volatile week in the markets.  So let’s get into it.  

 

Question One 

Last week, we saw stocks log their worst weekly declines since March as fears of a second wave of infections and doubts about a speedy economic recovery dampened investor sentiment.  The Federal Reserve indicated that rates are likely to remain near zero until 2022 and issued a cautious economic outlook.  The Fed’s cautious tone, in combination with news of an acceleration in new infections and hospitalizations in certain states as well as concerns about the speed of the rebound in stocks, triggered some profit-taking.  So, was it just that, David, profit-taking after a great run from the lows or should we be worried?    

Rick, Despite last Thursday’s violent -5.9% sell-off in underwhelmed reaction to Fed Chair Jay Powell’s press conference on Wednesday afternoon, the S&P 500 index at 3,041.31 closed the week and is still up +35.9% from the March 23rd low, although with a decided tilt towards Growth (ticker IVW $200.78, +39.9% vs. 3/23/20) over Value (ticker IVE $109.19, +31.6%) as the broader global macroeconomy remains plagued by the COVID-19 Coronavirus (“COVID”) pandemic.  This still leaves room for a further -5% correction from current levels to trade in the 2,800-3,000 range considered “fair value” for the S&P 500. 

Apart from profit-taking spurred by Powell’s tentative remarks, the news of renewed COVID outbreaks globally along with rising civic unrest, the fact that last week saw the return of the “-5% daily move” in the S&P 500 index prompts a quick review of the significance of this kind of volatility. 

Since it was formed in 1957 the S&P 500 index has had only 27 days when it has fallen by -5% or worse.  As the average daily change in the S&P 500 index is less than 1%, this indicates that a move of -5% or worse in a single day lies more than 5 standard deviations (“sigma”) from the average.  Based on the principles of probability, such a move should only occur once every few thousand years or so, not something that can or should be attributed to normal profit-taking.

Over the span of the S&P 500 index’s history, the greatest cluster of “-5% daily moves” was 12 days during the Financial Crisis & Great Recession of 2008-2009.  With the Thursday 6/11/20 decline marking the 5th day of such negative volatility during the current downturn, the COVID crisis is now ranked #2 in terms of equity market volatility. So, what does this all mean?

To our view, such volatility is a clear and unequivocal signal that government fiscal and monetary policy is lagging economic reality, something that is troubling as one might expect with a general election less than 6 months from now that politicians would rather put themselves ahead of the curve than to run so disastrously behind it. 

While there have been and still are hopes for a “V-shaped” recovery (e.g. see Morgan Stanley on the side of the “V-shaped” recovery, J.P. Morgan on the side of something more modest), the evidence is that until such time as consumers feel economically secure and physically safe the pace of recovery will be measured.  Consequently, time for Congress to stop dithering and get on the ball in passing the next fiscal COVID relief package.  As it is, with November fast approaching, their jobs are at stake.  

Question Two 

David, not a week has gone by since the beginning of this pandemic where we have not discussed the Fed in some way.  Last week, many felt that Thursday’s “sell off” was directly related to Federal Reserve Chairman Powell’s comments in his Post FOMC Press Conference. 

Powell essentially said: The economy is a disaster and we don’t see any signs of an imminent rebound, but the Fed will be here to do whatever it takes to support the economy until it gets better.  Which to me says the “Fed Put” is in play and reminds me of your past comments of the Fed (and the trend) is your friend.  What is more worrisome though,  is that the FOMC and Powell made virtually zero mention of a sustainable economic rebound.   

What are your thoughts from a Macro perspective on how we can achieve that sustainable economic rebound? 

Rick, When the COVID crisis is finally resolved, I fully expect there will be a re-make of the 1999 film “Being John Malkovich”, but this time it will be titled “Being Jay Powell” as clearly everyone is trying to get inside the mind of the Fed Chairman. Meanwhile, your guess on which actor will be cast for the leading role is as good as mine. 

That said, Jay Powell this week has the opportunity to clarify his macroeconomic thoughts not only once, but twice, as part of the semi-annual Humphrey-Hawkins testimony before Congress on Tuesday 6/16 and Wednesday 6/17 in which he will explicate the Federal Reserve’s Monetary Policy Report that was submitted last Friday. So, stay tuned on this front for Jay Powell to have the chance to be more definitive in his words regarding the macroeconomic outlook.

Meanwhile, with the Federal Reserve acting to back-stop the credit markets and so helping to tighten the spreads over Treasuries for investment grade (IG) and high-yield (HY) issues, last week did see something of a reversal as spreads widened out a bit. Nevertheless, corporate bond spreads were more resilient than stocks during Thursday’s risk asset selloff. Although so far in June the S&P 500 is lower, IG spreads remain lower by 17 basis points and HY by 14 basis points as of Thursday. 

What may be interesting in Jay Powell’s upcoming testimony, among other topics, is the possibility the question may be posed of whether the Fed has considered extending support to the equity market. Equities don’t have that backstop now and last Thursday was a 5-sigma down day. Bonds do have the Fed back-stop, so while spreads widened last week, fixed income price action was nowhere near as dramatic as what was seen in stocks. Just saying.

Meanwhile, for thoughts on ways in which to achieve a more sustainable economic rebound we offer some fiscal policy considerations later in the discussion in the context of considering not just recovering from COVID, but in putting in place the energy infrastructure needed to transition to a less carbon-intensive economy.

Question Three

David, let’s turn our attention back to the markets.  Last Thursday’s -1,800-point drop in the Dow brought back memories of the dramatic swings that were prevalent through February and March. Although the market declined -5% last week, it should not be lost that it is still +36% higher since late March and just -10% from its all-time high.  I did a little homework this weekend and history shows that the initial stages of new bull markets are typically characterized by strong gains.

 

Stock Market Performance

Bear market low 1 month 3 months 12 months
1974 19% 13% 38%
1982 19% 36% 58%
1987 14% 19% 23%
2002 14% 19% 34%
2009 27% 39% 68%
2020 25% 36%* ?
Source: Bloomberg, S&P 500 price return. *3/23/20-6/12/20. Past performance is not a guarantee of future results

According to Bloomberg, in the postwar era, every instance in which the stock market rose more than +30% from a bear market low turned out to be the beginning of a new bull market. So, in your opinion, could this be the beginning of a new Bull Market?

Rick, From the standpoint of textbook definition, any -20% retrenchment, or bear market, offers the chance to bring about a new bull market. With the S&P 500 index falling -33.9% from the high on 2/19/20 to the low on 3/23/20, the first condition of having a bear market has been met. Also, as you indicate, the +35.9% return from the low does show the second condition for the consideration of a new bull market has been met. 

However, given the tsunami of liquidity that has been unleashed as governments around the world have sought to mitigate the impact of the COVID pandemic, is it fair to say that this a bull market as its economic underpinnings are uncertain and the possibility that at some point the relief injected will likely be withdrawn?  Such circumstances could just as easily be termed an asset bubble wherein expectations have been floated while the economy remains on the rocks.  

Nevertheless, I am inclined to see that we are indeed in a new bull market, but one that will need to find its footing and as such is likely to be more of a grind higher from here than a continuation of the rocket ride from the March 2020 lows. 

In this context, it may be best for investors first to build core positions in solid Growth names prior to expanding into more economically exposed Value names until the desired firmer economic footing becomes clearer.

Growth vs. Value: Performance from 2/19/20 Peak  
   
  2/19 – 3/23 3/23 – 6/12 2/19 – 6/12 Recover %
Index Change % Change % Change % Of Peak
S&P500 -33.9% 35.9% -10.2% 89.8%
S&P500 Growth -31.4% 38.9% -4.7% 95.3%
S&P500 Value -36.8% 31.6% -16.9% 83.1%
Growth less Value 5.5% 7.3% 12.2% 12.2%
   
Russell 1000 (R1K) -34.7% 37.4% -10.3% 89.7%
R1K Growth -31.5% 40.3% -4.0% 96.0%
R1K Value -38.4% 34.0% -17.4% 82.6%
Growth less Value 6.8% 6.3% 13.4% 13.4%
   
Russell 2000 (R2K) -40.8% 38.4% -18.0% 82.0%
R2K Growth -38.5% 41.9% -12.8% 87.2%
R2K Value -43.1% 34.1% -23.7% 76.3%
Growth less Value 4.6% 7.8% 10.9% 10.9%

Question 4

David, there is a quote attributed to Aristotle – 

“It is the mark of an educated mind to be able to entertain a thought without accepting it.” 

I mention that because I recently read the headline, “Renewables surpass coal in U.S. energy generation for first time in 130 years.” 

The headline, while impressive, gave the impression that renewables had made a large, unexpected, leap forward versus coal and other fossil fuels.  Globally, our lives revolve around energy use, and lots of it.  Fossil fuels (such as coal, oil, and natural gas) generate most of that energy today.  Recent progress in renewables (like wind, solar, and hydropower) has been made, and I have no doubt that renewables are the future.  But do you see fossil fuel use on the verge of collapsing?  

Rick, While there was certainly a great deal of furor and speculation around the oil price crash and OPEC+ production cut pact earlier this year and the commodity’s subsequent price rebound, gasoline demand is beginning to recover in part due to people deciding to drive their own cars rather than run the risk of COVID infection by taking public transportation and, no, fossil fuel use is not collapsing.  Note that in 2019 global oil consumption was running at a rate of roughly 100mm barrels per day, not something that is about to disappear overnight. 

However, there is an opportunity in the COVID crisis to stimulate economic growth by public and private sector investment in climate-friendly infrastructure that will serve to create new jobs and position the global economy to address the longer run challenge of climate change. 

Note that neither COVID nor greenhouse gases care much for borders, something that makes both challenges global.  Furthermore, the two crises do not just resemble each other, they interact as shutting down the global economy has led to huge cuts in greenhouse-gas emissions.  However, on a global basis, there is still more than 90% of the necessary decarbonization left to do to get on track for the Paris Agreement goal of a +1.5 degree Celsius increase in temperature levels.

This leaves open a significant opportunity to not only stimulate economic growth, put in place pricing and tax frameworks to promote the use of less carbon-intensive energy sources and produce the revenues necessary to pay for the fiscal stimulus employed to offset COVID. In this way, policy can be both penny-wise in the short-term and avoid being pound-foolish by not taking advantage of currently lower opportunity costs to put the global economy’s energy infrastructure on better footing climate-wise for the long term.  

Question 5 

David, as we near the end of today’s episode I’m interested in your thoughts on the pandemics effect on Globalization.  

We are now seeing that the fallout from the coronavirus pandemic has capped growing disenchantment with globalization that we have observed over the past decade.  Fragile supply chains worldwide have been exposed by competition for essential medical and food supplies.  Unilateral export controls have been imposed to ensure availability of goods for the local market.  That has compounded the pandemic’s damaging economic effects, atop the human tragedy, adding to protectionist pressures to sustain U.S. living standards. 

Recent developments follow a long “hollowing out” of manufacturing and loss of high-paying blue-collar jobs, aggravating politically sensitive income inequality in the U.S. and abroad. Even The Economist sounded globalization’s death knell in a recent cover story referring to as Slowbalization!!  

David, could the pandemic’s economic and human toll bring an end to globalization?

Rick, While there was already consideration of the need to re-engineer supply chains away from following the strict rule of finding the lowest price available, something in part prompted by the U.S.-China trade war, the impact of COVID has been to accelerate the implementation of these nascent plans into action. 

Companies are learning from the COVID crisis to insure themselves against supply chain disruption through steps such as having at least two suppliers of every component or raw material.  Until now, logistics and supply chains may have been very fragmented and very vulnerable since the overriding goal of finding the cheapest global provider led companies to overlook the value of the provider who was just around the corner.

Yet it is not just supply chains that are being reconfigured, it is the entire social and political economy that has been underpinned by globalization.  As the world reopens from COVID, activity may recover, but we cannot expect unfettered movement and free trade to return.  As can be seen, COVID is politicizing travel and migration and entrenching a bias towards self-reliance.  To our view, this process of turning inward will undermine the economic recovery and thereby likely promote geopolitical instability.Consequently, it is critical for efforts to be made to reach an over-arching consensus to support an open global economy or face costs that may be greater than simply having to pay a higher price for imported products.  To find a way forward from COVID, I believe it better to have agreement around resilience than a divided self-reliance. As Ben Franklin once said, “We must, indeed, all hang together or, most assuredly, we shall all hang separately.”

June 8, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, recaps the markets and discusses the investment outlook with Laidlaw & Company Chief Market strategist, David Garrity. The topics discussed in this episode are macro level issues such as monetary policy and containing deflation and the human elements such as unemployment. Please tune in for more timely insights.

READ TRANSCRIPT

Hello and Welcome to another episode of “A Brighter Future” Laidlaw & Co’s Podcast Series. I’m Rick Calhoun CEO of Laidlaw Wealth Management and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co.

Good Morning David another beautiful weekend here on the East Coast so I have to ask, any special items on your bbq menu this weekend?

Rick, with beaches reopening, this weekend was a chance to get some sun, enjoy the frigid ocean waters and pick up some fresh shellfish – clams, mussels, oysters, so the grill got a break as the diet, like the economy, began to expand beyond its recent constraints.

As I sat down to put together today’s episode I was reminded of my Econ 101 Class in College where the Professor told us the stock market is a leading indicator and it will start to react to data before you get the data. Which I think in part, explains why the Dow climbed 1727.87 points, or +6.8% last week while the NASDAQ rose +3.4% to 9814.08 and the S&P 500 gained +4.9% to 3193.93.

David – those numbers would be an incredible week in any year but when you consider we have riots, disease, joblessness and widespread despair and the S&P 500 just closed the books on its best 50-day stretch ever it doesn’t make sense, but maybe it doesn’t have to anymore?

Is this retail investor FOMO taking over?

Rick, as a summer intern in Salomon Brothers equity research department during graduate school, I had the opportunity to make a presentation to Peter Lynch and several other portfolio managers at Fidelity Investments. Coming out of the conference room, the salesman who arranged the meeting thought it was well-received as orders had already been called into the trading desk and the shares of the companies discussed were moving higher. It was a thing of beauty, the salesman said, to watch “billions of dollars chasing an idea.”

While the stock market put up a compelling performance last week off the back of the massive upside surprise in the May employment report, we have noted previously that it is the flood of liquidity from central banks and fiscal relief programs that has been lifting all asset prices.

To your question of whether it is retail investors chasing the market higher, there have been strong indications that with the shutdown of other traditional speculative activities (e.g. casinos, sports betting), there has been a flood of individuals into the market as they have the time given their underemployment and the money given the relief funds they have received. Consequently, we can say the flood of liquidity has brought about a frothy market.

Talk about billions of dollars chasing an idea, namely the hopes for economic recovery. To see how this has played out across the stock markets segments such as Large Cap, Small Cap, Growth and Value, the table below shows that Value and Small Cap have been the laggards from the 2/19/20 market peak and have since mid-May 2020 been rallying hard.

Note that the Small Cap sector has benefitted from high yield spreads tightening.

David recently as I drove into the office in the early morning hours, there has been some heavy fog. Driving through fog is difficult. It’s hard to see the road and even harder to see the destination. As I drove through it though, I thought about the connection to our current situation, as we try to navigate a path from recession to recovery.

As the economy emerges from the lockdowns, investors continue to look for signs that the recovery is going in the right direction. In a week when civil protests were widespread in cities across the U.S. and geopolitical tensions between the U.S. and China continued to be elevated, the market kept its focus on economic and corporate drivers of long-term equity performance and that focus, as we discussed, was rewarded.

The S&P 500 is now just -6% from the February record high and has risen +43% from the March lows. Though the path between the strength of the equity rally and the current weakness in the underlying fundamentals is still foggy, I think three positive indicators are beginning to slowly clear the way and I’d like to get your thoughts on each:

First the Labor Market – Do you see “Green shoots” in the recovery from the reopening of the global economy?

Rick, the May 2020 Employment report offered indications that lower-skilled, lower-wage sectors have been seeing recovery. The table below offers a breakdown of the job gains seen in May with a contrast to the total number of jobs lost in March-April.

While some portion of the jobs gain reflects relief funds being spent to sustain employment, this does represent a major “green shoot” of recovery.

Next, Central Bank Stimulus – Can better credit conditions due to aggressive actions by central banks offset by high corporate debt?

Rick, the fact that the Fed has moved to backstop the corporate bond market has served to tighten yield spreads relative to Treasuries. With the Fed’s FOMC meeting this week, we expect to have further pronouncements underscoring the central bank’s credit market support extending into 2021.

Finally, Corporate Earnings – Will corporate earnings benefit from a sustained improvement in economic conditions, like the stronger-than-expected job gains posted for last month?

Rick, while the economic downturn from the COVID-19 Coronavirus (“COVID”) pandemic has been swift and severe, the interesting thing to note is that 2Q20 S&P 500 earnings at $23.67/share will actually out-earn its 2006-2007 peak operating earnings run rate (average quarterly earnings of $22 – $23/share over this time). Furthermore, Street estimates for Q3 ($32.01/share) and Q4 ($36.72) mirror 2017 and early 2018 S&P 500 earnings power. If those come to pass, they will serve to validate the recent rally.

David our Chief Investment Officer recently brought to my attention the impact the almost silent slide in the US dollar has had recently. In fact, some see it as one of the most ignored devaluations in history. Retail Investors might not have noticed but the slide by the U.S. dollar should get some of the credit for the stock market’s stunning rally.

Can you explain why that’s the case?

Rick, for the S&P 500 index roughly 40% of its earnings come from non-US sources. As such, a weaker U.S. Dollar will result in foreign currency earnings being translated back into more U.S. Dollar-denominated earnings per share. Last week’s aggressive fiscal and monetary actions in Europe served to raise the prospect of gradual improvement unfolding in the EU economy, something that helped weaken the U.S. Dollar as currencies tend to trade on GDP growth and interest rate differentials.

David – many of our listeners are already in or nearing retirement and considering their income options from their portfolios. A decade ago, investors were complaining about a 3.8% yield on the 10-year Treasury, because a decade before that, they were yielding 6.4%.

Recently though, 10-year Treasury was yielding 0.88% and as a result investors have gone further out on the risk curve, allocating larger portions of their portfolio to high-yield, emerging-market debt, and bank-loan funds.

That risk taking hurt badly in the coronavirus market rout between Feb. 19 and March 23 when we saw some Fixed Income ETF’s like HYG a High Yield Corp Bond fund plunge 22% and PFF a Preferred and Income Securities fund lose 27% !!

So David with rates so low, do income investors need to rethink Bonds?

Rick, while Treasuries meet the Will Rogers’ investment test of providing greater certainty as to the return of capital, you properly identify the present problem of being one of return on capital.

The need for better return rates on fixed income allocations has forced investors to look at either high-yield fixed income or possibly convertible preferred markets as a means of meeting their income generation targets.

Clearly, reaching for yield has required going out the risk spectrum. That said, with the Fed backstopping credit markets and corporate issuance being at record levels, investors have both some level of assurance and greater selection to consider.

David as we near the end of another Episode, I’d to again discuss what many consider the “real Hero” of the current markets – The Federal Reserve.

Since the beginning of Coronavirus Crisis, the Fed has taken a multitude of actions including:

  • Two (2) separate emergency cuts in the federal funds rate’
  • Massively increased repurchase agreement facilities
  • Announced an unlimited quantitative easing (QE) bond purchase program
  • Expanded dollar swap lines with other major central banks.
  • Reintroduced the money market liquidity facility
  • Reintroduced the term asset-backed securities loan facility
  • Announced the primary market corporate credit facility
  • Announced the secondary market corporate credit facility
  • Announced the municipal liquidity facility
  • Announced the paycheck protection program lending facility
  • Announced the main street lending program

David, two of the recurring questions I hear from clients, are 1) is the Fed just creating money? And 2) What do these high debt levels and the Fed’s actions imply for investment performance?

Rick, one of the benefits of the Fed being the central bank for the leading global reserve currency is that it offers some flexibility and discretion to be used in times of global crisis such as COVID.

While there will eventually need to be a withdrawal of the surplus liquidity that has been provided to sustain the global economy and thereby prevent a catastrophic crash into a period of prolonged deflation, the Fed is doing what is absolutely necessary at the present time to forestall the clearly more undesirable possibilities. As such, the Fed and other central banks are clearly intent on inflating financial markets so that companies and governments can refinance, extend debt maturities, and take other measures necessary to strengthen balance sheets and otherwise avoid catastrophic failure.

That said, I fully expect the stock market to run up to, if not through, its previous highs before seeing a pullback. We are investing in interesting times and it is important to recognize the Fed is doing what it can to support a “risk on” investment environment. As such, investors should at least remain at a “Hold” at the present time.

June 1, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this weeks episode of A Brighter Future Laidlaw Wealth Management’s CEO Rick Calhoun & Chief Market Strategist David Garrity discuss the Current Markets, the Impact of President Trump’s new tactics with China, the new EU Bond Offering, The Fed and Does This Market Still Have Room To Run.

READ TRANSCRIPT

Hello and welcome to another episode of “A Brighter Future” Laidlaw & Co’s podcast series. I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co.

Good Morning, David, I hope you had a nice weekend and we’re able to take advantage of the beautiful weather.

Rick, the hot weather rolled in late last week, so on Saturday I installed room A/C units. It was a bit of heavy lifting and a chance to break out the power tools. Meanwhile, like the market and geopolitics these days, things are running hot and we need to cool it down. 

David, I think it was a Beatles lyric that said “I have to admit it’s getting better (better) a little better all the time.” This week we saw stocks cap the month of May with back-to-back weekly rallies as optimism surrounding re-openings outweighed rising geopolitical tensions between the U.S. and China. 

 Additionally, continued positive developments on a possible COVID-19 vaccine and economic data showing signs of bottoming in April further bolstered sentiment. Meanwhile, WTI crude had its best monthly performance in 40 years.

Last week we talked about whether the market had moved “too far, too fast” but this week I want to ask should investors think “all clear” or stay clear?

Rick, the news last week on the monetary and fiscal policy front was uniformly positive with Fed Chair Powell stating on Friday that further relief will be provided until the economy is normalized. Even Senate Majority Leader Mitch McConnell chimed in to say Congress would decide whether to pass a “final” coronavirus relief package in about a month. That, along with the announcement of fiscal relief programs in the EU ($826 billion) and Japan ($1.09 trillion), served to give markets a clear view that the liquidity tide remains at flood stage. 

As a rising tide lifts all boats, it was not surprising that the market sectors that have lagged to date played some catch up with cyclical stocks and Value outperforming.

Overall, performance for the month of May was quite solid with regions announcing large relief programs showing strong performance in anticipation of the news. Growth holds the upper hand with a positive return year to date.

With the stock market resembling a liquidity-driven flywheel, the news flow has been positive to the extent that it has become divorced from the underlying economic realities where as long as the impacts of the COVID-19 Coronavirus (“COVID”) pandemic do not worsen in an unexpected manner the prospects for positive returns to investors remain intact.

Relative to valuation, the FactSet consensus 2020 S&P 500 earnings estimate is now $128/share, so the S&P 500 index at its March 2020 low of 2,237 traded at 17.5x trough earnings. With the S&P 500 index ending May 2020 at 3,044, the main questions to address are: 1) what are the 2021 earnings being discounted?, and 2) what can the S&P 500 earnings reasonably be in 2021? 

Note that the S&P 500 has a 35% weighting in Tech, so a 20x P/E multiple on 2021 earnings appears appropriate which implies EPS of $152/share. This would represent +19% growth from 2020 trough earnings while being -9% under the 2019 EPS of $163/share. Past recoveries off cyclical lows have seen earnings growth easily surpass +20% (e.g. 2001-2002 +20%; 2009-2010 +92%) which would result in 2021 S&P 500 of $154/share. Bottom line, the stock market is not anticipating anything that past history cannot support. 

That said, there are clear risks to the outlook ranging from further COVID outbreaks limiting economic recovery to China testing geopolitical limits with its suppression of Hong Kong and territorial incursions throughout Southern Asia to the outbreak of civil unrest in a populace grown weary of COVID and increasingly aware of the failings that have become apparent in government at multiple levels. Overall, there has been a critical loss of momentum in the global economy that has put the world at a threshold where the risk of things coming apart has to be taken into consideration.  

David, in each episode we talk about numerous factors that can influence the movement of the markets, but late on Friday we got a potentially major market mover with what appears to be an escalation of the “Cold War” with China. While the anti-Beijing and Wuhan animus seems to grow each day, I think the feared impact on our markets might not be realized. 

Meanwhile, on Sunday, the Federal Reserve Bank of New York released a study that showed the billions in tariffs have reduced the market value of U.S.-listed companies by $1.7 trillion during the course of the 2-year-old trade offensive. 

The study model found that policy announcements lowered U.S. equity prices in a 3,000-company sample group by a total of six percentage points. Those 3,000 companies represent a combined $28 trillion market capitalization, so the six-percentage-point fall wiped away $1.7 trillion. Which is the equivalent to the combined total of the national GDPs of Russia, Canada and South Korea.

David, we have not spoken about the tariffs on past episodes, so can I ask you to address the topic and what the direct and indirect impact could be on the markets?

Rick, as you are aware the impact of tariffs is borne not by the producers of the goods in question, but instead by the consumers of the tariffed items in the form of higher prices. 

In bringing a trade war against China, the Trump Administration chose to attack the globalization of the world economy that has relied on complex and extended supply chains that had to date served to deliver American consumers a greater range of goods at increasingly affordable prices. 

Companies were negatively affected by tariffs in that the trade war served to disrupt sourcing decisions that had been made to leverage the China market both in terms as a source of supply, but also as a source of demand. To this extent, companies both experienced higher costs and lower revenues as a result of the Trump tariffs. 

Not only that, but the attack on globalization served to create uncertainty as to long-term investment planning for companies as setting in place supply chains is a multi-year effort, one that in no small part relies on a stable and predictable trade policy regime. Important to also consider the distinct possibility that in time a de-globalized economy may very well lead to a more dangerous world as there are fewer ties that would serve to bind countries together and thereby restrain geopolitical adventurists.  

David, it appears as if the markets have become addicted to stimulus and, while having states reopen and the trillions of dollars paid out from Washington has been beneficial, the Federal Reserve has been the most crucial element lifting stocks. 

While the path of the virus is unknown. Could there be a second wave in the fall?  Can a vaccine succeed and how long will it take for an effective one to be found?  It seems as investors we need to be asking two important questions:

A) How long will the Fed provide the level of support that it has and… 

B) How long can the Fed continue to provide the level of support?

Rick, while investors may be justified in criticizing the Administration’s COVID response, the one part of the U.S. government that has been a stand-out performer in the current crisis has been The Federal Reserve under the leadership of Chairman Jay Powell. 

In remarks last Friday, which were his last prior to the next FOMC meeting on 6/9-10, Powell expressed his concerns as to the potential for a second COVID outbreak to limit the prospects for economic recovery and reiterated his promise to keep monetary policy loose until the recovery is well on its way and the U.S. unemployment rate – widely expected to surpass 20% in 2Q20 – has returned to healthy levels. With this the Fed’s intent is clear, now to determine its capacity. 

The Fed has ballooned its balance sheet, which it had been trimming before COVID, to a record-setting level of over $7 trillion. The Fed may need to do more before the crisis is over, to keep borrowing rates low even as the economic recovery takes hold. Powell has indicated the Fed has limits in that “the balance sheet can’t go to infinity, but there are limited risks based on what the Fed is doing right now to inflation or to financial stability.”

Bottom line, Rick, on Wall Street the trend is your friend and for now The Fed is clearly setting that trend. 

David, let’s head overseas, where on Wednesday last week the European Commission, which runs the entire EU, agreed to borrow €750 billion to provide a combination of grants and loans to southern EU countries (Greece, Italy, Spain) that have seen their budgets destroyed by the pandemic. 

Based on the research I have read, the EU, has always resisted issuing common debt—i.e. debt that all the EU countries have to pay back. Instead, individual countries issue their own debt (German bunds, Italian BTPs, etc.) with varying interest rates.  

David, if the EU embraces a common bond, over time could it pull demand for U.S. Treasuries and help the euro challenge the dollar’s status as the world’s reserve currency? 

Rick, while the EU at 741 million people has a larger population than the US at 327 million people, the US GDP at $20.5 trillion is still larger than the EU GDP at $15.9 trillion.

Moreover, within the EU there is only now emerging a consensus to allow for joint financial obligations which are not necessarily matched by unified taxation authority to ensure the servicing of such debt. 

Away from fiscal and governance structures, the global economy is fairly substantially U.S. Dollar denominated in terms of how a range of goods and services are priced and traded. 

This EU bond offering is an interesting and promising first step, but it will have to be stress-tested before it could be scaled to a point where the Euro could be considered an effective reserve currency alternative to the U.S. Dollar.

In his book “The Tipping Point”, Malcolm Gladwell points out that tipping points can be hard to spot in advance, but when they happen things can move fast. David, it looks as though the market is at or approaching a tipping point.

Market sentiment is starting to feel a little stretched. The percentage of bearish respondents in the American Association of Individual Investors survey fell to a 12-week low and Wall Street’s measures of sentiment reveal almost no bearishness at all. 

Citigroup’s Panic/Euphoria index, for instance, entered euphoria territory on Tuesday, while Société Générale’s sentiment indicator experienced its quickest shift from extreme risk-off to extreme risk-on in its history.

At the same time, others like noted market historian John Authers, see many “green shoots.”  

David, as a Market Strategist where do you see the next move from here? 

Rick, as we discussed earlier, at current levels the stock market is discounting 2021 earnings growth that is in line with previous economic recovery cycles. Meanwhile, the Fed is clearly indicating that further monetary relief will be made available to counteract the economic fallout that might attend further COVID outbreaks. The market as a liquidity-driven flywheel is set to show further gains and as such investors should anticipate appreciation. 

We note with interest that Goldman Sachs has withdrawn the 2,400 price target it had set for the S&P 500 index as it has broken through the technically significant 3,000 level. Looking back to when the Laidlaw Five 2020 Outlook was published in December 2019, we set a 3,420 price target for the S&P 500 index. Off the 2021 estimate of $154/share, the implied P/E valuation of 22.2x is high but in our view supported by what will be an accomodative monetary policy. That said, there is a potential +12.3% gain ahead to realize the Laidlaw Five 2020 Target. 

May 18, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, updates us with another Monday discussion with David Garrity, Chief Market strategist at Laidlaw and Company. Topics discussed are he mixed economic numbers and market reaction, the potential banking sector stocks buying opportunity, Presidential Election and advertising, thoughts on prolonged recession and a technical analysis of the market.

READ TRANSCRIPT

Hello and Welcome to another episode of “A Brighter Future” Laidlaw & Co’s Podcast Series. I’m Rick Calhoun CEO of Laidlaw Wealth Management and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co.

Good Morning David – another beautiful spring weekend. What was on the bar b que menu?

It was indeed a beautiful May weekend and the menu offered up a mixed grill of sausages, steak and swordfish along with asparagus, Brussel sprouts, corn on the cob, roasted garlic and potatoes across three dinners – good eating.

David – we had a tough week in the markets and the economy. On the markets front, we saw the Dow lose -2.7% for the week, the S&P 500 fell -2.3% and the Nasdaq declined -1.2%. In fact, it was the worst weekly performance the S&P 500 has had in the past nine weeks!

On the economic front, compliments of COVID-19, nearly 3 million additional people filed for first time jobless claims, while retail sales suffered the largest plunge on record, and industrial production cratered. As if that wasn’t enough, Federal Reserve Chairman Powell threw the stimulus ball back into Congress’s court and they “dropped the pass” while tensions are rising again between the U.S. and China.

Can you help our listeners sort some of this out?

Like the weekend menu, Rick, last week was mixed indeed.

To our view, on the negative side the stand-out item was the warning and admonition from Federal Reserve Chairman Powell last Wednesday that Congress best provide more fiscal relief being met with a shrug by Senate Majority Leader McConnell and a statement that criticized Powell for not saying when the aid was needed. Unfortunate words indicating a tone-deaf disengagement from the plight of American voters. You know with Powell indicating that the U.S. economy is poised to contract by more than -30% on an annualized basis in 2Q20, McConnell should have the sense to stop playing politics at a time like this. Talk about fiddling while Rome burns.

On the positive side, there have been indications that economies overseas have begun the slow pace of re-opening after putting in place measures necessary to contain the COVID-19 coronavirus (“COVID”), something that is also starting to happen in the U.S.. We are in a grindingly slow process, but one that is an upward progression economically from which investors should take heart.

Meanwhile, looking specifically at how companies are faring, we note with interest the lead article in today’s WSJ headlining that as companies have suspended financial guidance it has left investors at a crossroads.

With 90% of the companies in the S&P 500 having reported 1Q20 results, we are now getting a clearer read on how 2Q20 results are likely to unfold as analysts have had a better chance to digest company data. Here are the 2020 quarterly breakdowns with a comparison to where numbers stood two weeks ago when 55% of 1Q20 S&P 500 results were in:

1Q20: -13.8% (-13.7%) on +0.7% (+0.7%) sales
2Q20: -41.9% (-36.7%) on -11.3% (-9.5%) sales
3Q20: -23.8% (-21.0%) on -5.5% (-4.3%) sales
4Q20: -11.6% (-9.4%) on -1.2% (-0.5%) sales

Putting this on an annualized basis for 2020, the S&P 500 EPS is tracking at $129/share. Note that this is greater than the trailing 10-year average S&P 500 EPS of $122/share. As such, it would appear that the massive monetary & fiscal response to COVID has succeeded in keeping the earnings power of the companies in the index intact as it has backstopped aggregate corporate profit margins & liquidity and access to capital and solvency.

From a market valuation perspective this has clearly been significant. At the 3/23/20 low of 2237 the S&P 500 was trading at 17.3x its trailing 10-year EPS. Back at the March 2009 low, the S&P 500 was trading at 10x, now that was a point where investors had given up on America.

Now, as the market is clearly heavily dependent on monetary & fiscal relief, it is not surprising that the S&P is trading off -3.1% since 4/29/20 as the economic data from the March-April 2020 timeframe have come in decidedly negative from COVID lockdown thereby highlighting the need for further relief funding. Within the market we can see that the weakness is concentrated in Value as that market segment is down -6.6% while Growth is basically flat, only being off -0.1%. The longer the U.S. Senate dithers over the next fiscal relief package, the more likely the pull-back in Value is poised to accelerate.

So, here we are at the crossroads as the market debates the view on the S&P 500 EPS outlook for 2021. If we consider 2010 when U.S. unemployment stood at 9%, a range of $80-90/share is possible for next year and the market would be now valued at 33.7x earnings, a rich valuation by most standards. If the upside case is like 2014 when U.S. unemployment stood at 6%, a range of $130-140/share is likely and the market valuation at 21.2x earnings, above the 15.8x trailing 10-year average P/E multiple, but acceptable if viewed in the context of a post-COVID global economic recovery.

Time to put in a call to Senator McConnell’s office and let him know it’s time to get on board with moving more fiscal relief forward.

David, when the economy slips into a recession and the stock market tanks, investors are naturally inclined to sell bank stocks. After all, during the last recession and bear market in 2008, bank stocks were the biggest losers, with some bank stocks ultimately going to zero.

So it should be no surprise that bank stocks have been taking a beating with many down 25% or more YTD. But, all recessions and bear markets are not the same, and this isn’t 2008.

Everything I have read says Banks are in much better financial position than they were in 2008. So, is this an opportunity for our listeners to get some great companies
“On Sale?”

With recent 1Q20 results for the banking sector showing prudent steps to bolster loan-loss reserves and the fact that major financial institutions have been subject to annual stress tests since the 2009 Great Financial Crisis, Rick, I would agree that this is an area for investors to go bargain-hunting. Note that while Warren Buffett’s Berkshire Hathaway pared its stakes in GoldmanSachs and JPMorgan, it did increase its holding in PNC Financial. It will be interesting to see how PNC decides to redeploy the capital raised from the recent paring down of its stake in BlackRock.

Still, investors need to be aware of where major risks may lurk in the bank stocks. Back in 2009, the risk lay in collateralized debt obligations (CDOs). Since 2009, we have seen the rise of collateralized loan obligations (CLOs), a market that totaled $1.4 trillion in 2019.

In September 2019, The Bank for International Settlements (BIS) published a paper discussing CLOs and the potential risk they pose that noted, “the deteriorating credit quality of CLOs’ underlying assets; the opacity of indirect exposures; the high concentration of banks’ direct holdings; and the uncertain resilience of senior tranches, which depend crucially on the correlation of losses among underlying loans” are all risks that investors can expect to be tested by during the current downturn.

With that caveat made clear, it can nevertheless be tempting for investors to consider bank stocks, especially when names such as Wells Fargo are sporting +8% current dividend yields.

David, let’s pivot and talk about a topic that as part of our Laidlaw Five we believed would impact the 2020 Markets and that’s the Presidential Election. However, I want to look at it through a different lens – Advertising.

As campaigning for the 2020 presidential election heads into its final months, you and I recently discussed that political ad spending will hit an all-time high. The highly partisan political environment is driving more Americans to donate money to their preferred candidates than in past election seasons, which in turn is funneling more money into advertising. In fact, total political ad spending in the 2019/2020 election cycle is expected to reach $6.89 billion, and I know you believe that creates some opportunities for investment.

Please share your insights.

As we know, Rick, 2020 is an election year and elections have over time only become more expensive. For example, back in June 2019, Group M, a prominent ad agency, estimated spending for political ads in 2020 will reach $10 billion, an increase of +59% from the 2016 election year when an estimated $6.3 billion was spent.

With the onset of COVID, the level of digital engagement by the U.S. population has increased substantially, something seen in the 1Q20 results for Alphabet, Facebook, Snap and others providers.

The net result is the distinct possibility that digital is set to gain a substantial reallocation of the 2020 election ad budget, something that will serve to boost 2H20 results for these companies as well as Verizon (parent of Yahoo! and AOL), Comcast and AT&T.

Among the constituencies likely to prove critical to the 2020 election outcome, Millennials will be an area of focus. In this regard, Snap is of particular interest as evidenced by the following:

“Snapchat is a hot battleground in the 2020 election. Meme-like videos have helped Trump nearly triple his following to more than 1.5 million in about 8 months, far exceeding Joe Biden’s audience. But Biden is wising up as he is giving interviews on Snapchat’s political news show, Good Luck America. Millennial and Gen-Z voters make up 35% of the U.S. electorate, and Snap says the app reaches 75% of them a day.”

Bottom line: Investors should consider holding a basket of stocks leveraged to the rise in 2020 election cycle spending which should support, if not improve, their relative performance over the next 6 months.

David, I want to ask you a more Macro, “Big Picture” question around the potential for Prolonged Recession, something raised this week in a speech given by Fed Chairman Powell.

Obviously, that would not be good for stocks as a prolonged recession would depress earnings and the market multiple, bringing back memories of recent “prolonged recessions,” like 2009-2010 and 2001-2002, where stocks traded horribly. But I want to believe the Fed is going to make a big difference, especially when you consider in the last two months the Fed balance sheet has increased from $4.1 trillion to $6.7 trillion. That’s $2.6 trillion in two months!

David, can the Fed be our savior or could we be in for another 2009-2010?

Rick, as discussed in our opening response, the Fed has the wherewithal to have a considerable impact in denting the economic blow from COVID, but in our view monetary relief alone will prove to be insufficient. The Fed cannot do it alone. Congress needs to act. Otherwise, we could be looking at 2021 S&P 500 EPS of $80-90/share, down -34% from the 2020 run-rate of $129/share. Markets can look through earnings declines when the path forward to recovery is clear, but right now there are still too many unknown unknowns such as the probability associated with COVID Wave 2 and perhaps even COVID Wave 3.

As mentioned earlier, Fed Chair Powell sees the U.S. economy shrinking at a -30% annual rate in 2Q20. This is based on a number of near-term economic forecasting models developed by regional Federal Reserve branches. For example, the NY Fed’s “NOWCAST” model as of Friday 5/15/20 calls for a -31.1% rate of decline as negative surprises from retail sales and industrial production data mostly offset positive surprises from a regional survey and international trade data. The Atlanta Fed’s “GDPNow” model sees a -42.8% rate of decline with 2Q20 real personal consumption expenditures growth and real gross private domestic investment growth decreased to -43.6% and -69.4%, respectively.

Rick, these are clearly not numbers to write home about or to tell anxious voters. Hello, Senator McConnell, it’s America calling. Time to put down your fiddle.

David, as we near the end of another great episode, I thought maybe we could talk about a topic that might benefit our listeners as they watch the markets on a daily and weekly basis and that’s Technical Analysis.

As a backdrop, Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. So, you’ll hear people reference things like 50 Day Moving Average, Trading Ranges, Support, Resistance and even crazy terms like “The Death Cross”

I know I was taught that any good portfolio manager uses both fundamental analysis and technical analysis, and this past week there was a lot of talk about the Trading Range for the S&P 500 as well as the resistance it might hit at 2950.

So, David, do you follow Technical Analysis and are there any “Tricks of the Trade” that could benefit our listeners?

Rick, as we highlight that the market is at a crossroads as investors consider the prospects for the balance of 2020 and the outlook for 2021, it is helpful to consider insights from a range of disciplines. This is especially true when we are faced with the fact that from 3/23/20 low, the S&P 500’s top 5 stocks (i.e. Alphabet, Amazon, Apple, Facebook and Microsoft) have comprised more than 25% of the +28% gain since then. In the past, such concentrated rallies have not lasted. A study of instances where the S&P 500 set a 52-week low and then rallied over the next 35 days showed that in the 8 times when the top 5 stocks provide over 20% of the gain, each time the rally fails.

While technical analysis tends to focus on relatively short-term price trends over 5-day, 10-day and 50-day trading day windows and considers the 200-day average to be a key level of support or resistance, I have looked at longer term averages such as the 400-day as providing the baseline of support for a market upturn or downturn.

Right now, the 400-day level for the S&P 500 stands at 2893, a level just +1% above the Friday 5/15/20 close of 2864. While the 200-day average at 2998 may represent overhead resistance for the market until economic fundamentals become more clear, we are encouraged that the recovery from the 3/23/20 low has brought the S&P 500 index back to a level we consider the bedrock for the market’s recovery from the March 2009 lows. Not in any way a guarantee of smooth sailing, but a sign that the technical damage done by the sell-off from the 2/19/20 peak has been to some extent limited.

That said, for now, call your Senators and go with Growth.

May 11, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Laidlaw Wealth Management updates us with another Monday discussion with David Garrity, Chief Market Strategist at Laidlaw & Company. Topics discussed are last week’s economic data, technology stocks, negative interest rates, bitcoin and outlook for 2021.

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Hello and Welcome to another episode of “A Brighter Future” Laidlaw & Co’s Podcast Series. I’m Rick Calhoun CEO of Laidlaw Wealth Management and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co.

Good Morning David – I trust you had a nice weekend although you needed your bar b que more for warmth than cooking. Snow in May, very odd.

Rick, not exactly the time of year for a polar vortex, but then we live in interesting times. Nevertheless, the outdoor grill was manned and ready for the Mother’s Day cookout, thank you for asking.

Odd is also a good way to characterize the markets this past week. We had bad economic data and mediocre earnings —and the stock market just kept going higher. The Dow Jones Industrial Average rose 608 points, or +2.6%, to close at 24,331. The S&P 500 index rose +3.5%, to 2,930. The Nasdaq Composite beat both its peers, rising +6% to close at 9,121, cracking the 9,000 barrier again. The Nasdaq, amazingly, is up on the year, having tacked on almost 2,500 points, or +38%, from the March lows. Not bad, considering the damage that Covid-19 has wrought on the economy. David, what’s your take on what’s going on?

Rick, there is a saying on Wall Street that you go with what is working. This is the primary insight behind the “momentum” style of investing which draws on the first law of Newtonian physics, namely that an object remains in motion unless acted upon by a force. As we know, the COVID-19 Coronavirus (COVID) pandemic has been met with a record level of fiscal & monetary stimulus which while it has not prevented a record level of unemployment as indicated by the April 2020 Employment Report released on Friday 5/8 it has nevertheless served to provide the liquidity necessary to propel stock prices as measured by the S&P 500 index to a +31% recovery from the 3/23/20 low.

Within the stock market, growth stocks have led the recovery with a +33% gain while value stocks have posted a more modest +27% rise. This is not a function of growth performing worse than value in the S&P 500’s -34% sell-off from the 2/19/20 peak in which growth declined -31% as value plummeted -37%. With the S&P500 now off -13% its peak, investors should note that growth is down only -9% while value is still -20% down. Put it this way, if investors were long growth and short value from the peak to now, they would be +11% ahead. So, clearly growth is working in both down and up markets as shown in the table below.

The reasons supporting growth’s outperformance are relatively clear in that the shift to the COVID work-from-home (WFH) economy has made our society increasingly dependent on the technology companies who comprise a significant proportion of the growth stock index. The tech sector’s recent 1Q20 results have demonstrated continued revenue and profit growth in the face of a shrinking economy. With the likelihood that the WFH economy will persist as the return to the office will be gradual and likely not to return to pre-COVID levels, we have witnessed what perhaps should be considered an enduring repricing of the tech sector.

Bottom line, the pace of recovery is clearly uncertain and I expect that for the stock market to continue its recovery from the 3/23/20 low that further fiscal and monetary relief will be necessary. To that end, it will be critical to investors to see how Congress performs in this regard since with the upcoming general election in November 2020 the window of opportunity may be limited as campaigns get underway over the summer. Hopefully the politicians will understand that an employed constituent is a likely supporter and take the necessary actions. Meanwhile, although it has not re-covened, the U.S. House of Representatives is expected to hold votes as early as this week on a massive economic aid package for state and local governments.

David, let’s unpack the markets a little bit and talk about an area where I know you focus a lot of research – Technology. You were recently on Bloomberg Radio talking about names like GOOGL, AAPL, AMZN etc. and a few moments ago we referenced the move the NASDAQ has made off the March 23rd low but something that has become a bit distressing is the concentration of capital in what are being called “The Big 5” – GOOGL, MSFT, AAPL, AMZN & FB.

While the Nasdaq is now positive for the year, roughly 75% of the stocks in the index are down. But the Nasdaq, like the S&P 500, is weighted by market capitalization, and larger companies count for more. As of Friday’s close, the top 10 stocks, which include tech names like AAPL, AMZN, and MSFT, account for about 44% of all the value in the 2,700-stock index and those stocks aren’t cheap. On average, they trade for about 47x estimated 2020 earnings.

While the outsize weighting of major tech names fueled the Nasdaq’s bounce-back, should investors be worried?

As we have discussed previously, the present is an economic environment where the strong can rapidly become much bigger while the weak will be killed and eaten. Companies such as the “Big 5” have not only the resources needed to survive, but to thrive during COVID. Put more formally, Rick, last week noted value investor Clifford Asness published a piece defending value investing titled “Is (Systematic) Value Investing Dead.” In his analysis, “investors are simply paying way more than usual for the stocks they love versus the ones they hate (and measured using our most realistic implementation this is the clear maximum they’ve ever paid) and doing it in a highly diversified way up and down the cross section of stocks.”

The piece covers 50 years of stock market history going back to 1965 in its analysis, an impressive span of time that lends Asness’ conclusion substantial weight. However, it is interesting to note that in 1965 Gordon Moore published a paper with an insight that became known as “Moore’s Law,” which accurately predicted that computing speed/dollar would double every 2 years or so.

It is good for investors to consider that this growth in computational productivity has supported the difference we are seeing in today’s market as there is a clearly evident divide between those companies that leverage Moore’s Law and the companies that are being disrupted by it.

The period since 1965 has seen change unfold at an accelerating pace and perhaps the post-COVID WFH economy should be considered a tipping point. All I can tell you is that value investors need to be aware of how the underpinnings of our economy are shifting in making appraisals of value and allocations of capital. Otherwise, they risk coming up a dime or more short. Bottom line, if investors want more, they better get Moore.

David, let’s move to something that many veteran market watchers paid close attention to, but I don’t think the average investor did and that was when late last week, federal-funds futures began to indicate that the Federal Reserve’s key policy interest rate would fall below 0% by late this year.

While negative interest rates have been imposed by other central banks, notably the European Central Bank and the Bank of Japan, Fed officials have indicated on several occasions that they don’t favor a similar policy. While it’s still possible that we could see negative yields on U.S. Treasuries, the yield on the 2 year turning negative isn’t the same thing as the Fed “going negative”

So let me ask this as a two part question David:

First, I have read that “negative rates” is a term that’s used to describe a phenomenon that can have different meanings, can you elaborate on that for our listeners?

Rick, negative rates generally mean that a bank will charge you a storage fee for holding your cash rather than offer interest as an incentive for saving. As such with negative interest rates holding cash balances for investment purposes is discouraged and instead cash should be used for consumption because otherwise the holder of cash in penalized. With negative rates the greatest value of cash is the present. To hold it for future periods is to receive lesser value. That is the best definition of negative rates that I have.

Second, could we see negative rates in the U.S. like we’ve seen in Europe and Japan and if so, does that sentence the U.S. economy to future slow growth like we’ve seen in Japan and the EU?

Rick, the use of negative rates as a monetary policy tool has been when deflation is a significant concern. In recessions, people and businesses tend to hold on to their cash while they wait for the economy to improve. But this behavior can weaken the economy further, as a lack of spending causes further job losses, lowers profits, and prices to drop—all of which reinforces people’s fears, giving them even more incentive to hoard. As spending slows even more, prices drop again, creating another incentive for people to wait as prices fall further.

With the U.S. unemployment rate now at 14.7% and official views that the unemployment rate may rise to 20-25% before a gradual recovery unfolds paced by COVID containment measures, the U.S. economy is clearly at risk of experiencing deflation as incomes and consumer spending contract sharply. The April Employment Report presented a statistical oddity as average hourly earnings rose. This was due to how the job losses were so overwhelmingly concentrated among lower income, service industry workers.

One important point to note here is that lower income households have a higher propensity to consume, if for no other reason than they have less savings to fall back on. As mentioned earlier, Congress needs to act to provide further fiscal relief to support incomes otherwise the U.S. economy will face a significant risk of deflation among other possible negative consequences from the COVID depression. Deflation follows in the footsteps of the demand destruction pandemics such as COVID cause.

At present the Bloomberg Global GDP Tracker is indicating a -4.8% contraction in 2020. On a global basis it is estimated that a -20% contraction of income and consumption could push 524mm people into poverty (i.e. surviving on less than US$5.50/day (roughly $2k/year)). Even assuming a -10% contraction would result in an additional 249mm people living in poverty. With the COVID depression it is important for investors to consider the possibility that poverty will become more widespread in the U.S.

I want to make a 180 degree turn here David and talk about something that has been sort of forgotten and that’s Bitcoin. It was announced last week that billionaire investor Paul Tudor Jones one of the first well-known hedge fund managers, having started Tudor Investment Corporation in 1980 at the age of 25, believes that Bitcoin, the controversial digital currency, reminds him of gold in the 1970s, and may be the best hedge against inflation in the age of coronavirus.

Paul Tudor Jones is definitely someone we should pay attention to, he made a name for himself and a lot of money for investors by correctly calling the 1987 crash. He also shorted Japanese equities a couple of years later just before that market collapsed and then most recently he made a call on gold in June of 2019 that has played out almost exactly as predicted. So, as someone who knows a great deal about Bitcoin, is he right?

Rick, while we earlier discussed the risk of deflation from demand destruction in the wake of the COVID pandemic, we have to consider that assuming the tsunami of fiscal and monetary relief works in serving to stabilize the global economy and putting it on a path towards recovery there will be a distinct possibility inflation returns.

To that end, Paul Tudor Jones co-authored a paper published last week titled “The Great Monetary Inflation” in which he notes, “in a world that craves new safe assets, there may be a growing role for Bitcoin.” Jones offers this insight in the knowledge that monetary aggregates such as M2 are growing at the fastest rate since the end of WWII when annual M2 growth peaked at almost +27%. As the Federal Reserve is primarily focused on the employment support element of its mandate, Jones notes that “any (interest rate) hiking cycle is likely to be delayed and unambitious.” Separately, Jones sees in the COVID pandemic inflationary developments as “a breakdown in global supply chains spills overs to goods prices, undoing two decades of disinflation attributable to globalization.”

Against this analytical backdrop Jones offers a roster of likely inflation hedges in which Bitcoin ranks #4 after #1 Gold, #2 The Yield Curve (long 2-year bonds, short 30-year bonds) and #3 The NASDAQ 100. No wild-eyed cryptocurrency libertarian, Jones is just a seasoned successful investor “who wants to capture the opportunity set while protecting my capital in ever-changing environments.”

For Jones, Bitcoin represents “the only large tradeable asset in the world that has a known fixed maximum supply.” In a world where currencies are being devalued through massive monetary stimulus, assets that have a relatively fixed supply such as Bitcoin and gold are effective hedges against the anticipated inflation to follow.

David, as we wrap another episode this week, I thought maybe we could look ahead a little bit. Last week Professor Jeremy Siegel from the U of PA said “we’ve seen the lows in March and we will never see those lows again” expressing optimism about the path forward for the U.S. stock market, despite a historically bad jobs report. However, it’s his final statement that I’d like to focus: “I think 2021 could be a boom year, with the liquidity that the Fed is adding it could be a really good year.”

Do you agree?

Rick, focusing on Siegel’s point relative to liquidity, I agree that the March lows are unlikely to be re-tested on the conditions that Congress acts to provide further fiscal relief and that measures to contain a second wave of COVID infection prove effective.

On the first qualification, we noted earlier that the U.S. House of Representatives will likely act this week to provide further relief, but this is no guarantee that the U.S. Senate will approve, especially as Majority Leader Senator McConnell has taken the view that states should be allowed to declare bankruptcy to restructure obligations such as public sector pensions. To our view, such a political exercise would be akin to playing a game of musical chairs on the decks of the S.S. Titanic.

As to whether COVID containment measures will prove effective, we note that infection rates in the U.S. outside of New York City have remained high. Consequently, it is possible that with at least 10 states moving to re-open without meeting CDC guidelines a spike in infection rates may occur in June.

Consequently, we are at a delicate point, but I remain cautiously optimistic that the market will continue to grind higher from here as Congress moves to provide further liquidity and COVID is contained. That said, go with what is working, go with growth.

May 4, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Laidlaw Wealth Management updates us with another Monday discussion with David Garrity, Chief Market Strategist at Laidlaw &Company. Topics discussed include, the market and impact from COVID-19, corporate earnings, Berkshire Hathaway Annual Meeting, Federal Reserve Meeting, the future of electric vehicles and the potential bear market.

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April 27, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, updates another Monday discussion with David Garrity, Chief Market Strategist at Laidlaw & Company. Topics discussed are: Markets rising oversees, COVID-19 numbers coming down and moves to open economies. More on the oil market, and a discussion on how Blockchain could be an efficient way to source medical equipment and validate COVID-19 immunity. Lastly, the Draft Kings debut thru the use of SPACE (Special Purpose Acquisition Company).

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Hello and welcome to another episode of “A Brighter Future” Laidlaw & Co’s Podcast Series. I’m Rick Calhoun CEO of Laidlaw Wealth Management and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co.

Good Morning, David. Thank you again for joining me this morning.

Rick, It’s great to be back with markets rising overseas following last Friday’s rally on Wall Street and news, on balance, is good. Data over the weekend showed COVID-19 Coronavirus (“COVID”) deaths slowed the most in more than a month in Spain, Italy and France, and all three countries have signaled tentative moves to open up their economies.

Meanwhile, there is a lot on deck for investors to consider this week with the Fed, BOJ and ECB all due to announce policy decisions as the battle against the COVID pandemic continues. Several major economies will release GDP numbers, while corporate earnings will keep coming in, including results from names such as Amazon, Barclays Plc, Facebook and Samsung Electronics, among others.

David, a few episodes ago, you referenced the famous Chinese curse “May you live interesting times” for the events we were living through and last week I referenced the quote from Dickens’ Tale of Two Cities, “It was the best of times, it was the worst of times” as a way to define the week.

I think the best way to sum up this week is – Bizarre. We had the oil market in such a pricing collapse due to lack of storage space you could possibly have gotten paid you to store it in your swimming pool and we had a jobless claims report that now shows over 26 million Americans have filed for unemployment benefits in the past five weeks yet the Energy Sector finished up almost 2% for the week while the S&P & Dow were each off less than 2% and the NASDAQ was flat.

Wasn’t this week the type of week that should have scared the hell out of people?

I fully expect investors to have picked more than a few gray hairs of late and last week was no exception, especially when focusing on the energy market where oil prices went to negative levels last Monday. Prior to the COVID crisis, daily world oil consumption was about 100mm barrels. Demand now, however, is somewhere between 65-70mm barrels per day. So, worst-case, roughly a third of global output needs to be shut-in. With WTI now trading at $14.50/barrel, at least we can say prices are positive compared with a week ago, but the dislocations in the market are just beginning to be factored in.

What began as a fight for global oil market leadership between Russia and Saudi Arabia has ended up taking U.S. producers out of the market as they have already started to move to shut-in production ahead of the 9.7mm barrel per day OPEC+ cut coming Friday 5/1. Meanwhile, investors should understand that the break-even oil price for most U.S. shale oil producers is around $45/barrel and Saudi Arabia needs $80/barrel to make its budget, so there is just a sea of red ink sloshing around the oil sector right now. Domestically, major shale oil producing states such as North Dakota are already seeing a rapid retrenchment in production. Oil producers there have already closed more than 6,000 wells, curtailing about 405,000 barrels a day in production, or about 30% of the state’s total volume. Going downstream, U.S. oil refiners processed just 12.45 million barrels a day on the week to April 17, the lowest amount in at least 30 years and looking ahead to May 2020 global refineries could halt as much as 25% of total capacity.

Globally, there is a greater likelihood of Middle East conflict in this environment. Though badly afflicted by COVID, Iran shows no sign of reducing its operations in Iraq, Syria, Yemen and elsewhere. Meanwhile Israel could soon start annexing the West Bank. All in all, the chances of a regional blowout, which America will either be drawn into or castigated for neglecting, are rising again. This is not something investors can disregard as the decimation of America’s shale-oil firms now underway could eventually lead to a renewed dependence on Saudi oil.

Apart from that and the fact that 26mm Americans are filing for unemployment benefits, things are not that bad from a market perspective. Thanks to the massive and relatively rapid monetary and fiscal policy response, COVID has not taken the S&P 500 down as much as the 2008 Financial Crisis did. At this point in the 2008 experience (start the sequence with 9/29/08, the first -5% move for the S&P), the index was down -17.6%. Now, (start with 3/9/20, the first -5% “crash” day), the S&P 500 is actually up +3.3%. So, based on the valuation for U.S. large cap stocks, this indicates a market view that the worst outcomes are off the table.

As such, the stock market believes the US economy will not be shut down again as testing, contact tracing and social distancing successfully contain COVID until better therapeutics and a vaccine arrive. This is underpinned by a view that monetary and fiscal authorities will remain on guard, ready to allocate fresh capital to keep consumers and businesses relatively whole until the US economy restarts. In all this, it is important for investors to understand that big businesses stand to benefit as smaller firms struggle, a real tailwind for the fundamentals of large public companies.

As I mentioned, one of the big highlights of the past week was what occurred in the oil markets, so I’d like to focus on that topic for minute if you don’t mind. In our Laidlaw Five outlook one of our concerns was an exogenous shock that could take the price of oil to over $75/barrel. We truly did get an exogenous shock, but nothing like any of us have experienced. David, beyond the obvious answer of Demand specifically for refined products such as gasoline thru people driving and flying again, how do we see our way out of this mess?

The stock market’s belief that current policy measures are sufficient to support a share price recovery underscores the outlook that the U.S. economy will stage a recovery as we move later into 2020. Over the weekend, Treasury Secretary Mnuchin stated his view that 3Q20 would see strong growth. Summer generally sees a seasonal peak in energy consumption, so demand recovery will be the main driver to clear the current record oil inventories.

Looking out further, though, it is harder to see a rapid drawdown of oil inventories as economic growth is likely to be fairly modest and the path of economic recovery “W-shaped” with slowdowns and restarts around potential subsequent COVID outbreaks. Using the Fed Funds Futures (FFF) curve as a market-based forecast for economic growth, it currently discounts essentially 100% that the Fed maintains its current 0–25 bp interest rate policy through at least November 2021. While not as actively traded, the FFF’s 2022 prices show it is not before June 2022 that the odds of a Fed interest rate increase go above 50%.

Bottom line, with economic growth appearing to be this sluggish, the oil production capacity being shut-in now is likely to remain offline through the end of 2021.

David, I want to turn to a topic now that I know is near and dear to your heart and where you are considered an industry leader as one of the founding partners in BTblock – Blockchain.

There was a fantastic article this week that discussed how Blockchain could be an efficient way to source medical equipment or validate COVID-19 immunity. Now to most of our listeners as well as myself, blockchain is best known as the record-keeping system behind cryptocurrencies like Bitcoin and Ripple. In its simplest terms, blockchain is a decentralized way to keep records that are shared among participants and that cannot be changed.

However, I know it’s not simple so maybe you could offer some insights into the world of Blockchain along with explaining how it could be a potential weapon against the Coronavirus.

At its heart, it is that simple. We are talking about data integrity. Deploying blockchain across the current fragmented state of health data, that is the challenge.

Like all pandemics, COVID has served to highlight human frailty. However, unlike all previous pandemics, COVID is impacting a global economy which depends on the successful operation of highly complex and extended supply chains. Changes in business strategy have resulted in companies that are now more extended enterprises than vertically integrated firms. As such, they need to ensure reliability and consistency. At the same time, consumers have come to demand more information about the goods they purchase.

Distributed ledger technology (DLT), or blockchain, is means to deliver the high level of integrity increasingly demanded. This is especially so as the global economy increasingly deploys sensor networks that enable the “internet of things” (IoT). With an increasingly digitized global economy, cybersecurity needs are becoming of greater importance. In this regard, DLT offers a greater means of securing data, whether enterprise or personal.

In the context of COVID, DLT can offer a means to provide anonymized health data records. Over the weekend, my colleague, Dr. Alex Cahana, published a Medium post “COVID-19 Data Is Valuable Because We Are Valuable.” Dr. Cahana states that to address COVID successfully we need mass testing, crowd intelligence and decentralized tracing. Economically speaking, 35mm tests per day at an annual cost of $100bn, is a fraction of the $350bn in monthly losses due to the ongoing lockdowns and social distancing measures in the US. In terms of health data, clinical notes, lab and imaging results, genomic and wellness data added to insurance claims, purchasing and social media input has contributed to an already saturated 2.7 zettabyte (2.7tn gigabytes) digital universe.

COVID has shown, however, that this digital universe is fragmented, uncoordinated and quite fragile. Health data might be designed for daily operations, but it is not organized for multi-party crisis management, which requires real-time research and analytics. Moreover, the presence of many intermediaries like enterprise data warehouses, data aggregators, administrators of patient and government registries have created an attack-, collusion- and censor-vulnerable environment.

With COVID there is a continued reliance on this fractured data universe to provide information, but it does not leverage the real-time capabilities of federated learning, combined with privacy preserving technologies (like ZKP, TEE and Homomorphic encryption) and blockchain. One of the efforts to protect personal privacy led by MIT, is building an open, interoperable, privacy-preserving protocol called Private Automated Contact Tracing (PACT) which is designed to be a technical standard/specification that anyone can deploy on any smartphone without revealing private information to other individuals, the government, health care providers, or cellphone service providers.

There is an opportunity in putting in place the health data platform necessary to combat COVID to deploy a decentralized approach, where both contact and location data are collected exclusively in individual citizens’ “personal data stores”, to be shared voluntarily, only when the citizen has tested positive for COVID-19, and with a privacy preserving level of granularity. DLT is a technology protocol that can enable this approach.

Dr. Cahana concludes the article by making a critical observation, “We are our actions and our actions are who we are. These actions are captured by data and every time these data are used, abused or sold by a 3rd party, a part of our dignity is stripped away. These technologies are not merely privacy-preserving, but are dignity-preserving.”

While COVID may have served to highlight again our human frailty, this is now a time where technologies such DLT can be used to maintain human dignity.

David let’s bring it back to the markets and a topic that I have received more than a few questions about – the debut of Draft Kings this past Friday (DKNG) through the use of something called a Special Purpose Acquisition Company, or SPAC. For our listeners who aren’t familiar, a SPAC is a company with no commercial operations that is formed strictly to raise capital through an initial public offering for the purpose of acquiring an existing company. They are also known as “blank check companies,” and have actually been around for decades, it’s just that in recent years, they’ve gone mainstream, attracting big-name underwriters and acquiring companies such as Richard Branson’s spaceship company Virgin Galactic Holdings (SPCE), Twinkie-maker Hostess Brands (TWNK), restaurant chain TGI Fridays and of course the aforementioned Draft Kings. In fact, last year, SPACs raised a record $13.6 Billion in 59 IPO’s!!!

David, what else should our listener’s know about this growing segment of the public markets and is it something that should be part of an investment portfolio as we move forward in this new world?

As you said, Rick, Special Purpose Acquisition Companies (SPACs) have been with us for some time. Note that the SPAC management team has a limited period of time, typically 24 months, in which to identify the acquisition target and structure a deal. Once the deal is set, the SPAC investors have to approve the transaction. If approved, the newly acquired entity becomes the operating business of the company.

While SPAC issuance was typically seen as indicative of a market top, investors should consider that in light of the stock market decline, particularly for smaller companies, the acquisition environment for SPACs has improved in 2020. As such, the deals SPAC teams strike may prove on balance to be more attractive than their historical record which has been more “hit or miss.”

As we come to the end of another great episode, David, I’d like focus our final question on a topic that has been written about a great deal over the years and that is the great value vs. growth debate. In fact, this week in our Quarterly Investment Committee meeting we spent a great deal of time discussing that very topic so I think our listeners would be interested in your thoughts and whether it’s time to rotate out of growth and into value or if you even agree that is a strategy to pursue?

The debate of Growth vs. Value is kind of a “chicken or the egg” argument. Before companies become large established firms they start as small unknown entities that contain within them the seeds of greatness.

I’ve spent enough time over the course of my time on Wall Street to been exposed to both sides of the debate, first in my time as a research analyst covering the global auto industry where value was most times the determining factor in making recommendations and later in following technology companies where the trade-off between a company’s growth prospects in terms of its addressable end market and its valuation drove recommendations.

What I can say is that the pace of disruptive technology innovation has accelerated over time and this inexorable march poses a growing challenge to all established companies, namely either disrupt yourself or risk being disrupted. With that insight I tend to view many companies that fall in the Value category to be those at risk for disruption. It is said that companies earn their valuation over time and with that it helps to recall the hallmark statement from the film “The Shawshank Redemption,” namely, “Get busy living or get busy dying.”

To bring this point back to the context of our discussion today, we noted earlier that the COVID downturn favors larger firms as having an advantage over smaller entities. I would say that this applies most categorically to the tech sector’s mega-cap companies, the “FANG” names who have ample financial strength to take advantage of the present downturn to move into a wider array of businesses.

The stock market recovery in part reflects this as these names represent +20% of the S&P 500, a level of concentration not seen since the 2000 market top. What is different now is that these companies are solidly profitable and as they take advantage of the COVID downturn are very likely to increasingly become so. Obviously, nothing grows to the sky, but for the present the “FANG” names may be relatively unchallenged.

That said, we are happy to be proven wrong as we continue to look for those emerging companies who contain with them the seeds of future greatness.

April 20, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, updates another Monday discussion with David Garrity, Chief Market Strategist at Laidlaw & Company. Topics discussed are the impact of COVID-19, economic data releases, the inflationary impact of fed stimulus, oil prices and the plan for opening up businesses in America.

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Hello and welcome to another episode of “A Brighter Future” Laidlaw & Co’s podcast series. I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co.

1. Putting together this week’s episode, I was reminded of the famous opening paragraph from Charles Dickens’ novel, “A Tale of Two Cities,” – “It was the best of times, it was the worst of times” and I think our listeners would agree. On the “best of times” front, we had the major averages all positive for the week with the NASDAQ leading the pack up over +6% (+16.6% over the past 2 weeks), followed by the S&P 500 with a gain of +3% (+15% over the past 2 weeks) and the Dow up +2.2% (+15.2% over the past 2 weeks) while on the “worst of times” front, we had another unemployment claims report in excess of 5mm, bringing the 3-week total to over 22mm, March 2020 retail sales plummeted to worst ever on record, industrial production dropped to the lowest level since 1946 and there were dismal earnings from firms like JP Morgan, Goldman Sachs, Schlumberger Rite Aid and Bank of America.

What’s your take on this market? Is this a “bear market” rally and if so, should investors consider some de-risking here?

With the S&P 500 up +28% since the March 23rd low and the rally in tech sector mega-cap names ensuring the Nasdaq 100 is no longer down for 2020, this is more a time for investors to look opportunistically at the dislocations that have taken place in the securities market. A well-known institutional investor, Oaktree Capital founder Howard Marks, made a very salient point in this regard in his 3/31/20 investor letter, “waiting for the bottom can keep investors from making good purchases, so the investor’s goal should be to make a large number of good buys, not just a few perfect ones.”

That said, please recognize we are in the midst of a corporate earnings reporting season where many companies will take the high degree of uncertainty as a chance to say that they aren’t able to give guidance, something that normally would be anathema to Wall Street. At this time, however, we believe investors should look more to two factors that together are constructively supporting the market upturn here: 1) the developments taking place around containing the spread of the COVID-19 Coronavirus (“COVID”), and 2) the extent and timing of the fiscal & monetary policy response to alleviating the economic impact of COVID.

2. On past episodes, you have shared the importance of paying attention to economic indicators to give you an idea of where the market and economy are headed. I’d like to make this a two-part question, First why were the three reports (i.e. retail sales, industrial production & the Empire State manufacturing survey) so are important? Second, I think many people hear the terms – leading indicators and lagging indicators. Can you share with our listeners the primary differences and what you focus on?

The importance right now of the economic data is that they demonstrate just how devastating the impact of COVID has been. The sudden nature of the economy’s deceleration is something to behold and its impact is being widely felt. While production data is important, we all know that supply follows demand. In this regard, retail sales plunging -8.7% in March 2020, the biggest decline since the U.S. government started the monthly data series in 1992 (after falling by a revised -0.4% in February 2020), gives a stark indication of the cliff the U.S. economy just fell over. With consumer spending providing 70% of the U.S. economy, the retail sales number clearly spells out the magnitude of the deceleration as demand evaporated in the face of COVID across a range of sectors.

Note nevertheless that while COVID is destroying demand in the retail sector it is also serving to accelerate shifts in the channel. For example, U.S. e-commerce spending is up more than +30% from the beginning of March 2020 through mid-April 2020 compared with the prior year period, according to market research firm Rakuten Intelligence. Along with the overall boom in e-commerce spending, sales data show consumers have shifted their focus to entertainment products (e.g. books, games) reflecting the new normal of life in quarantine.

As investors we are always trying to look ahead. The stock market tends to anticipate events roughly 6 months ahead. Relative to leading versus lagging economic indicators, it is interesting to note that retail sales along with the S&P 500 index are two of the ten data series used by The Conference Board in constructing its Leading Economic Index. Lagging indicators primarily confirm what has already happened and so may not offer as much informational value. In this regard, the March 2020 retail sales report was the deer that just came through the windshield.

In terms of the economic indicators I rank as most important right now, the one data series available with the greatest frequency is the weekly U.S. unemployment claims report released at 8:30amET every Thursday. The fact you mentioned earlier that 22mm workers have filed for unemployment in the last 3 weeks is staggering. Bear in mind that the U.S. workforce was at a high of 164.6mm in February 2020, so 13.4% of that total is now unemployed. COVID is taking a severe toll.

3. If you don’t mind, let’s stay on the topic of the economy – I have heard more than a few people raise the prospect that all of these Fed dollars and spending programs will, eventually, be inflationary. Is that something you’re concerned about and if so, how should our listeners be positioned to best take advantage of that scenario playing out?

With WTI oil prices trading at $14/barrel, I do not expect that investors will have to be concerned about an energy input price lead inflation spike anytime soon. However, seeing as more than $8tn of fiscal and monetary stimulus (9% of 2019 global GDP) has been added to the global economy with the onset of COVID, it is appropriate to consider whether this may have long-run inflationary consequences.

There is a market-based means of tracking this, namely, Treasury Inflation-Protected Securities, or TIPS, which are securities whose principal is tied to the Consumer Price Index (CPI). The principal increases with inflation and decreases with deflation. So far in 2020, TIPS have appreciated +3.4% and were at their March 6th high up +5.7%. Note that TIPS have traded up to 5-year highs in 2020 and are back near the highs last seen in December 2012, so the market is attuned to possible inflation acceleration. Still, with substantial portions of the global economy under COVID lock-down, we do not see inflation in today’s real economy with the distinct exception of toilet paper. Near term, however, the additional liquidity provided by fiscal and monetary stimulus appears to have found its way into financial asset pricing, namely the +28% gain by the S&P500 off its March 2020 low.

Investors may wish to have some hedge against inflation. Historically, that role has been fulfilled by owning gold-linked securities. So far in 2020, gold as tracked by the SPDR Gold Trust (ticker: GLD) is up +11%, in the process outperforming TIPS. Either way, in this market, a positive return is something to be appreciated.

4. As we have discussed on previous episodes and in the “Laidlaw Five,” Healthcare remains a place where investment dollars continue to flow and this week we saw some exciting news on the COVID-19 front as Gilead Sciences reported positive results, albeit in a very small population, from their drug Remdesivir. In addition, as we touched on last week, there are 254 clinical trials testing treatments or vaccines for the virus, many spearheaded by universities and government research agencies, with hundreds more trials planned. But I think our listeners would be interested in your thoughts on the topic discussed recently by Barron’s that Healthcare will be going Digital with things like Teledoc. To me, in addition to the disruption of how we work every day, do you think how interact with our healthcare providers will alter radically as well?

During COVID, the shortcomings of the healthcare system in terms of items such as personal protective equipment (“PPE”) have highlighted the need to be able to deliver healthcare services remotely, a development clearly serving to bring forward the transition to digital in healthcare.

In NYC, for example, at Mount Sinai Health System, the hospital started treating patients from outside their negative-pressure rooms to minimize times workers had to enter: nurses monitor ventilators remotely, and doctors call patients on tablets via Zoom to conserve PPE. Separately, Mount Sinai data scientists built artificial intelligence tools to speed discharges. A program scans a patient’s medical records, combing through blood work, vital signs and temperature readings to determine who can be sent home in the next 72 hours. Through raw ingenuity, it was developments like these that allowed America’s beleaguered health system to remain afloat throughout the COVID crisis.

With a new-found appreciation for how technology can be better integrated into how healthcare is delivered and public health monitored, investors can expect to find innovations coming forward during the COVID crisis. One important long-term consideration is how the trade-off between public health and personal privacy is managed as substantial amounts of personally identifiable information will be gathered in the process of COVID testing, tracing and tracking. Data anonymization techniques will be required in order to uphold such newly introduced standards such as GDPR and CCPA. Stayed tuned for developments in this area.

5. On Thursday night last week, the White House outlined broad new federal guidelines for opening up the country that will put the onus on governors to decide how to restart the economies in their states amid mounting fallout from the coronavirus outbreak.

The guidelines outline a three-phase process for opening up the country based on the scope of the outbreak in individual states and also don’t suggest specific reopening dates. Instead, they encourage states to base their decisions on data. It seems like this is a good “first step” at getting people back to their lives, careers and schools. Setting aside personal political opinions, could you address the plan and give us your thoughts on how this could be good for the macro-economy and the markets?

First off, it is critical to recognize that no restart plan can stand a reasonable chance of success without having sufficient testing resources in place, something that arguably will require federal government support to state and local governments that have been fiscally hard-hit by COVID.

Looking at New York State, for example, Governor Cuomo said over the weekend that with a $16bn budget deficit that spending levels in public hospitals may need to be cut by -50%. A federal plan to reopen the U.S. economy that delegates responsibility to the state governments without providing the necessary aid and support is doomed to failure from the get-go.

Second, this is a critical time to distinguish between necessary social services and discretionary personal services. The need to educate our children, to allow college and graduate students to complete their degree programs is a necessary part of the human capital formation that will drive the U.S. economy over years. The unavailability in the re-start program of safe, secure and reliable childcare programs in an economy where one in three jobs held by women has been designated as essential work puts a substantial portion of the population at risk and likely serves to deter labor participation by placing unacceptable barriers in the way.

Federal government support for testing, safe day care centers and educational institutions is critical. Arguably, other more discretionary services such as restaurants and movie theaters are going to have to wait. In this effort, the federal government is going to have to lead from the front, not to set up the states for failure, especially those states that have suffered the brunt of the COVID crisis and paid the price in full.

6. As we close out this podcast, I would be interested in your thoughts on the return of some of the major sporting events. The NFL Draft will be occurring this week on-line, but the PGA, NBA and MLB all appear to readying a return, sans fans, in the next few weeks. Do you think it could be a great morale boost for people to watch a baseball game, basketball game or golf tournament instead of re-reruns of the ’85 National Championship (which, by the way, Villanova still wins)?

We welcome the return of sports for the inspiration they offer us all of human achievement, of individuals on their own or by coming together as a team overcome challenges and triumph over adversity. Together we will get through this, no doubt, and, with the return of sports, it is going to take some balls to do it. That said, let’s play ball!

April 13, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, updates another week in the markets and COVID-19 coverage with David Garrity, Chief Market strategist at Laidlaw and Company.

The topics discussed in this episode are macro level issues, the virus, oil, gold and the human elements like unemployment, social distancing and fed policies. Some recap of Laidlaw Five from December 2019 and how that impacts current issues. Please tune in for some more timely insights.

READ TRANSCRIPT

Hello and welcome to another episode of “A Brighter Future” Laidlaw & Co’s podcast series. I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co.

1. We had a holiday shortened week that produced a +12% move up in the S&P 500, +13% for the Dow and +11% for the NASDAQ. So, is that an “All Clear” for investors or is this one those “Rip Your Face Off” rallies in a bear market that we hear the pundits on Bloomberg, CNBC, and Fox News discuss?

Yes, we managed to squeeze roughly 2 years-worth of expected stock market returns into 4 days with the S&P500’s +12.1% gain, but to be honest it is fair to say the market got by with a little help from the Fed. The $2.3 trillion program announced Thursday 4/9 came on the heels of another record-breaking weekly unemployment claims report of 6.6 million workers.

Note that including the Fed’s efforts, the major Western economies have to now put out relief programs totaling $8 trillion (9% of 2019 global GDP of $87 trillion). Clearly, a tide of liquidity is being unleashed globally in response to the COVID-19 Coronavirus (“COVID19”) pandemic.

In all this, it is becoming clear that perhaps a bottom has been seen for the stock market, barring an unforeseen failure of COVID19 containment measures.

2. On Thursday 4/9/20, The Federal Reserve unveiled emergency programs that could dole out more than $2 trillion in loans to businesses of all sizes, as well as to struggling city and state governments, in a bid to keep the economy afloat as it is ravaged by the COVID19 pandemic. Is this much Fed intervention good and is it needed or is there some “moral hazard” here as they now are buying low-grade debt?

When over 10% of the U.S. workforce has filed for unemployment benefits over the past 3 weeks, the time for contemplating niceties such as “moral hazard” is limited as the overriding goal for the Fed is to salvage as much of the U.S. economy as it can under the employment portion of its mandate. As such, the Fed is engaging in a “no holds barred” effort to address the COVID19 economic downturn, one that is likely to be protracted. The thinking within the Fed Open Market Committee (“FOMC”) was indicated over the weekend by Minneapolis Fed Governor Neel Kashkari commenting that without an effective therapy or a vaccine for COVID19, the U.S. economy could face 18 months of rolling shutdowns as the outbreak recedes and flares up again.

Moral hazard notwithstanding, markets are clearly encouraged by the Fed’s readiness to offer support that will extend into purchasing low-grade private sector and municipal debt. Some speculate that before all this is through the Fed may follow the path of the Bank of Japan to purchase equities directly. Strange times call for bold measures.

These developments have prompted investment firms, such as Laidlaw, to call that the bottom for the stock market has already been reached. Goldman Sachs has withdrawn its previous near-term S&P500 2,000 price target and put up a year-end 2020 S&P500 price objective of 3,000. Our Laidlaw target of 3,420 is more ambitious and will be subject to fine-tuning as more data becomes available over the upcoming 1Q20 corporate earnings season.

3. Relative to the 2020 election, this week with Senator Sanders officially suspending his campaign it appears that Former Vice President Biden is the presumptive Democratic nominee to run against President Trump in November. What might this portend relative to the economy, foreign affairs and the global standing of the U.S.?

While the current U.S. Administration was significantly involved in Russia and Saudi Arabia and other OPEC+ member countries reaching agreement over the weekend to reduce daily oil production by 9.7mm barrels (12% cut from 2019 daily global oil production of 80.6mm barrels), the fact remains that the current U.S. President is clearly a nationalist committed to moving our country away from the global leadership position it has held since 1945.

Although the U.S. Federal Reserve last week took significant action to bolster the U.S. economy and help stabilize global financial markets in the process, this week there are equally critical meetings of the IMF and The World Bank that aim to help stabilize the developing countries where the vast majority of the world population lives. The U.S. interest in having these meetings succeed lies not just in preserving markets for U.S. investment and export, but also in ensuring these regions do not become reservoirs of COVID19 infection and sources of even greater mass migration.

No one nation alone can protect itself in the face of a global pandemic such as COVID19. Going it alone is not an option. Working successfully with existing multilateral institutions and global partners requires a different mentality than the “zero-sum” approach that President Trump personifies.

That said, these times require a different leader. Former Vice President Biden has a demonstrated record of working effectively on a global scale. Known to many leaders across the world, Biden is the person who can provide the leadership expected from the United States. Biden will get the job done and get America on the road to rebuilding its economy. In contrast, Trump would preside only over a continuation of the COVID19 pandemic that his undoing of preceding administration’s prevention efforts brought upon the country.

4. As a follow-on to politics, let’s talk about investments that can be dramatically impacted by political events – commodities and more specifically, Oil and Gold. First, Oil. Last Thursday might have been one of the most important days for the energy markets in years, if not decades, with the OPEC+ meeting. It’s hard to believe that a few months ago we were worried the price of oil might exceed $75 per barrel and today we’re questioning if it could drop below $20. What’s your take on the OPEC situation and what could be expect?

As mentioned earlier, global oil production is on track for a -12% reduction from prior year levels. Whether this will be sufficient to return the price of oil to the U.S. shale-oil producer breakeven level of $45/barrel depends on the extent of the U.S. economy’s decline.

Recently, plans have been put forward to re-start the U.S. economy from its current state where 95% of the population is under “stay at home” orders. On balance, the plans indicate the economy will return to roughly 80% of its pre-COVID19 levels. Now, although that may sound encouraging, it still represents an economic collapse in line with The Great Depression.

Presume the U.S. experience would be matched by the rest of the world economy and quick math would tell you a -12% oil supply cut will be swamped by a -20% economic contraction. The markets are reflecting oil prices staying the $20-30/barrel range for now with WTI trading at $23, down from the $29 price spike on Friday 4/3 when OPEC+ discussions were getting underway.

5. Next as far as Gold, our Investment team at Laidlaw Asset Management has had a Gold allocation for some time and as a member of our Investment Policy Team you know we increased that recently. However, for every article written about the portfolio benefits of having an allocation to Gold there are two saying things like “gold is a barbaric relic that no longer holds the monetary qualities of the past. In a modern economic environment, paper currency is the money of choice” or “gold’s only benefit is the fact that it is a material that is used in jewelry.” With Gold being up 15% YTD thru last Thursday, does an allocation still make sense and if so why?

Like all investments, the price of gold reflects a carrying cost which is namely the interest rate charged to finance a position.

With interest rates declining dramatically worldwide, the cost of owning gold has fallen accordingly. Given the expected monetary relief over the next 18 months, interest rates are likely to remain low. So, this is one good reason for gold to appreciate in value. Second, there will be record levels of fiscal stimulus which over time may result in a return of inflation. Gold has historically been considered an inflation hedge.

That said, gold is up +14.7% so far in 2020 and likely to hold these levels, if not trend higher.

6. To bridge back to another of our “Laidlaw Five” themes, Healthcare. I read last week that according to Informa Pharma Intelligence, there are more than 140 experimental drug treatments and vaccines for the coronavirus in development world-wide, most in early stages, including 11 already in clinical trials. They went on to say that counting drugs approved for other diseases, there are 254 clinical trials testing treatments or vaccines for the virus, many spearheaded by universities and government research agencies, with hundreds more trials planned. In fact, researchers have squeezed timelines that usually total months into weeks or even days. I am assuming this massive response to COVID19 not only supports our investment thesis for healthcare but maybe offers some new segments for our listeners to consider?

The healthcare sector has been a greater area of focus for investors than even the Laidlaw Investment Committee had considered in December 2019. Dealing with the COVID19 pandemic requires testing, healthcare system capacity building (e.g. staffing, equipment, supplies), palliative measures and, eventually, curative vaccines.

As is well known, developing a vaccine is a process that will take time. Experimental therapies can be developed and put to test in 6-12 months, but to get to a proven, commercially available vaccine may take 18-24 months. That said, it is important to see what palliative measures are already commercially available that can serve to stabilize patients and thus reduce the burden on existing equipment (e.g. ventilators).

In this category, we are interested to see that Pfizer’s Viagra may prove effective in treating COVID19. A pilot study in China is testing the drug in COVID19 patients with breathing troubles who do not yet need mechanical breathing assistance. Like nitric oxide, Viagra, known generically as sildenafil, dilates blood vessels. As such, Viagra may help open the tiny vessels that draw oxygen from the lungs, allowing patients to overcome the respiratory distress that occurs in some cases of COVID19.

7. As we near the end of this week’s episode, let’s come back to overall markets and economy. Recently there has been a “parade of pundits” suggesting their thoughts or vision on the shape of the recovery. I have heard everything from a W, V, U, L, a Check Mark and this weekend Barron’s even referenced blips of an electrocardiogram or “EKG.” Can you offer some guidance on this “alphabet soup” and what your best guess is for the shape of the recovery.

In estimating the path of the U.S. economy’s recovery, the process of containing and eradicating COVID19 will bring a “start, stop” character to the economy as expected periodic outbreaks will lead to re-imposition of social distancing measures. Consequently, it is likely that “W” will end up the winner in this forecasting alphabet contest.

Meanwhile, in anticipation of COVID19, available capacity is likely to be cut significantly for businesses such as airlines and restaurants, moves for which there may not be a pricing benefit as demand is still suppressed. For example, Lufthansa has mothballed a substantial portion of its aircraft and stated that air traffic volumes may not recover to pre-COVID19 levels for 40 years.

Longer term, research on the economic impact of pandemics has shown that real rates of return are depressed for up to 40 years as demand is suppressed and input costs (e.g. wages) are moderately higher.

As part of developing a longer-term view, it is important for investors to consider that firms surviving the COVID19 crisis will have to master a business environment which sees the acceleration of three trends: 1) an energized adoption of new technologies, 2) a reconfiguration of global supply chains, and 3) the likely ascendance of well-connected oligopolies.

We will discuss these trends further in the weeks ahead.

April 6, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, updates another week in the markets and COVID-19 coverage with David Garrity, Chief Market strategist at Laidlaw and Company.

The topics discussed in this episode are 1) the macro take on the market, unemployment spike and and the virus exceeding 1mm infected. 2) Trumps tweet on oil which impacted the market, what happened and where does oil go from here? 3) of the 19 bond fund categories tracked by Morningstar all but 4 were down what is happening? 4) your thoughts on the CARES Bill and it seemed to have a rough start? 5) how is COVID-19 impacting the upcoming elections? 6) were we too comfortable riding the bull market to realize the severity of the “black swan event” of the coronavirus? 7) we understand you have created a new COVID-19 portfolio with Ken Mathieson, Head of Laidlaw Asset Management can we get a “sneak peak”?

READ TRANSCRIPT

Hello and welcome to another episode of “A Brighter Future” Laidlaw & Co’s podcast series. I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co.

1. QUESTION: After last week’s developments (e.g. March 2020 Employment Report, Oil Price Spike, COVID-19 Coronavirus (“COVID19”) spread), what are the near-term factors driving the markets?

ANSWER: Right now, there are estimates that the U.S. economy is operating at 75% of its rate prior to the onset of the COVID-19 Coronavirus (“COVID19”). One item from the March 2020 employment report released Friday 4/3 is that the broadest U-6 measure of unemployment rose +1.7 percentage points to 8.7% of the U.S. workforce from 7.0% in February 2020, the largest month-to-month change in the history of the data series (starts in 1994) and a clear indication of the magnitude of COVID19’s shock to the economy.

If sooner is better for the stock market in terms of economic recovery, then “V-shaped” (quick down, quick up) is better than “U-shaped” (quick down, slow up) recovery. The fact that Fed Funds Futures are not pricing in a “V-shaped” recovery means it is likely the stock market doesn’t have a “V-shaped” recovery priced in either, so the likelihood of further rapid stock market collapse may be diminished.

That said, there are bulls out there who may be premature in their recovery timing. Apart from how quickly the healthcare policies to contain COVID19 are relaxed (note this is expected to be gradual, not rapid, hence the “U-shaped” recovery expectation), the other critical variable markets will have to deal with is the global price deflation caused by the protracted demand destruction COVID19 wrecks upon leveraged corporates. More broadly, deflation taking hold will serve to raise investor concerns as to the earnings power of companies and depends on whether their business models can function profitably in this new economic environment. The market will likely have difficulty handling the wholesale rethink of corporate earnings power deflation brings.

In investing as in the land of the blind, the company with positive pricing power (an analogy to sight) is king. How well we navigate the tides of deflation depends on both finding companies with positive pricing power and, if aggressively inclined, shorting companies that do not.

For now, COVID19 remains the gating factor on the economy and the stock market. Near-term, the flattening of the infection curve will offer support to bulls. The full measure of recovery will likely be the realization of either a commercially available vaccine or reaching a level of herd immunity, something that may require 60% of the global population to be infected which would be approximately 4.7 billion people out of the estimated 7.8 billion world total.

2.QUESTION: What developments are taking place in the energy sector and are there any positives for the broader economy?

ANSWER: The effort on the part of the U.S. to stabilize the price of oil is aimed at keeping prices over the break-even $45/barrel level for U.S. shale oil producers so employment can be sustained and corporate defaults forestalled in the energy sector. Whether Saudi Arabia and Russia can reach an agreement to reduce production levels remains to be seen, but it would appear to be in their long-run self-interest to undermine U.S. energy independence.

For now, with WTI oil futures trading at $27.70/barrel, the market is apparently not putting much credence in the likelihood of the U.S. succeeding in its price stabilization plan. Separately, lower oil prices translate to lower gas prices at the pump which does provide some benefit to the U.S. economy, so it is good to be mindful of the available positives at the juncture.

3. QUESTION: Relatively low-risk investments such as bond funds have seen price declines this year. Of the 19 bond fund categories tracked by Morningstar, only 4 have seen price increases this year. What is taking place here?

ANSWER: We discussed earlier investors having to come to grips with deflation, a pricing environment that the global economy has not had to deal with for some time.

Right now, the world’s biggest source of deflation is China where producer prices registered a -0.4% decline in February 2020 compared with a year ago after rising +0.1% in January 2020. This is a drag on the price of goods being shipped overseas from the world’s biggest trading nation.

The problem with deflation for fixed income investors is that it raises default risk as loss of pricing power causes issuers to fail. Arguably, the decline in bond funds last week is a confirmation that higher levels of default risk are being priced into the market. Similarly, the widening out of credit spreads for lower-grade borrowers.

4. QUESTION: The Fed has stepped up on the monetary policy front in terms of providing support to financial markets, but clearly the economy requires substantial fiscal relief as well. With CARES I bringing $2tn in relief, to what extent will that carry the U.S. economy?

ANSWER: The Friday 4/3/20 failure to launch for the relief payments offered to small businesses under CARES I was unfortunate and indicative of the haphazard character of the current Administration’s efforts to address the COVID19 crisis. That said, the expectation is relief payments will be forthcoming over the course of April 2020 which may serve to blunt to some extent further sharp increases in unemployment.

The bigger question now is how discussions are shaping up around CARES II. With Congress not scheduled to be back in session until Monday 4/20/20, there is a slackening in the pace of relief efforts that are urgently needed to support the U.S. economy during the COVID19 crisis. Indications are that current COVID19 containment measures may be extended and so remain in place until late in 2Q20.

As it now stands, the CARES I relief program is thought sufficient to support the U.S. economy until early May at best. With GOP leaders such as Senate Majority Leader McConnell indicating a reluctance to move forward on CARES II until having the opportunity to examine the full benefit of CARES I, the risk is that Congress will fall behind the curve in trying to get out ahead of the COVID19 impact on the U.S. economy.

5. QUESTION: In all the focus on the COVID-19 Coronavirus response attention has been diverted from the 2020 elections. Any developments there to note?

ANSWER: Due to COVID19, Democratic presidential primaries have been postponed in 15 states and the Democratic Convention has been moved back to August 2020. The main effort to keep the 2020 elections on track will be to make sure that voting by mail is a viable option.

CARES I contained roughly $400mm in funding to develop the option further, but Congressional leadership has stated publicly that the full amount required is closer to $2bn. To that end, prospects for the 2020 elections going off as planned may depend significantly on the passage of CARES II.

6. QUESTION: COVID19 clearly meets the definition of a “black swan” event, an “unknown unknown” for investors. While COVID19 was in the news at a low level in early February, there was no one who was sounding the alarm. Is this just what happens with a very speculative stock market, at the peak where there is a new normal that things are wonderful?

ANSWER: Going into 2020, the stock market was riding high on hopes that the Trump trade wars were dying down as the Phase I agreement had been reached with China and the downward pressure the tariffs had imposed on the global economy was beginning to be lifted.

The possibility of a global pandemic such as COVID19 was clearly a long-tail event, an “unknown unknown” that no one expected, much less factored into their near-term forecasts. It is likely to result prospectively in investors opting to have some type of hedge protection in place. The days of being an unhedged long investor are over.

7. QUESTION: We have discussed macro ideas, but how should investors implement these insights with some portfolio ideas. For example, the playbook says when fundamentals begin to deteriorate, you head towards defensive sectors such as consumer staples, health care, utilities and real estate investment trusts. Do you ascribe to a similar playbook? As well, I understand you have been building a new COVID19 Portfolio with Laidlaw Head of Asset Management Ken Mathieson, maybe you can offer a “sneak peek” here.

ANSWER: The traditional defensive investment playbook is undergoing revision as deflation is beginning to be factored in. Pricing power is a far more scarce commodity these days. Meanwhile, structural shifts to a more distributed workforce and increased levels of automation as organizations right-size their operational footprint to achieve sustainable profitability have implications that are negative for overall employment and consumer spending levels and highlight the likelihood of excess capacity in the commercial real-estate sector that may take a protracted time to clear.

That said, we have put together some thoughts on which companies are likely to prosper in the current environment as well as become more central to the global economy henceforth. Please find the list here:

Technology
Microsoft (MSFT, $160.68, market cap $1.2tn),
Amazon (AMZN, $1,956.15, market cap $974bn),
Nvidia (NVDA, $260.58, market cap $160bn),
Zoom (ZM, $119.05, market cap $33bn),
Atlassian (TEAM, $134.41, market cap $33bn),
Slack (WORK, $24.82, market cap $14bn)

Healthcare
Abbott (ABT, $80.69, market cap $142bn),
Regeneron (REGN, $508.05, market cap $56bn),
Teledoc (TDOC, $150.11, market cap $11bn),
Moderna (MRNA, $34.49, market cap $11bn)

Leisure
Netflix (NFLX, $369.17, market cap $162bn),
Activision (ATVI, $61.88, market cap $48bn),
Take-Two (TTWO, $121.09, $14bn)

Food
Walmart (WMT, $122.52, market cap $347bn),
Costco (COST, $297.12, market cap $131bn),
Uber (UBER, $24.64, market cap $43bn),
Campbell (CPB, $49.05, market cap $15bn),
Dominos (DPZ, $334.36, $13bn)

Technology

Microsoft (MSFT, $160.68, market cap $1.2tn),

Amazon (AMZN, $1,956.15, market cap $974bn),

Nvidia (NVDA, $260.58, market cap $160bn),

Zoom (ZM, $119.05, market cap $33bn),

Atlassian (TEAM, $134.41, market cap $33bn),

Slack (WORK, $24.82, market cap $14bn)

Healthcare

Abbott (ABT, $80.69, market cap $142bn),

Regeneron (REGN, $508.05, market cap $56bn),

Teledoc (TDOC, $150.11, market cap $11bn),

Moderna (MRNA, $34.49, market cap $11bn)

 Leisure

Netflix (NFLX, $369.17, market cap $162bn),

Activision (ATVI, $61.88, market cap $48bn),

Take-Two (TTWO, $121.09, $14bn)

Food

Walmart (WMT, $122.52, market cap $347bn),

Costco (COST, $297.12, market cap $131bn),

Uber (UBER, $24.64, market cap $43bn),

Campbell (CPB, $49.05, market cap $15bn),

Dominos (DPZ, $334.36, $13bn)

March 30, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, updates another week of market volatility and COVID-19 with David Garrity , Chief Market Stratigest at Laidlaw & Company.

The topics discussed in this episode 1) was what happened last week just a Bear Market rally? 2) Does the Fed move last week and the $2 trillion stimulus package justify the best week for stocks since the 1930s? 3) Was the historic jobless claims simply virus related or a sign of something worse? 4) Do you think this stimulus package is enough or will we need more? 5) what guidance would you give our clients at this time trying to navigate the markets?

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Hello and welcome to another episode of “A Brighter Future” Laidlaw & Co’s podcast series. I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co.

1) David it seemed like last week lasted a year instead of 5 business days, but this time last Monday when we spoke I don’t think either of us could have predicted what would unfold. That day, S&P broke thru the 2200 level and the markets had their worst day since 1987, only to be followed by an almost 20% moved back up b/w Tuesday thru Thursday!! I have heard that Bear Market rallies can be violent, some even call them “rip your face off” rallies. Is that what happened and maybe more importantly is that what we can expect going forward?

In broader terms, the MSCI All Country World Index plummeted roughly -34% from its February record high to its recent low on Monday 3/23/20. So far, it has recovered more than 25% of that loss. To our view, it reflects the “buy the rumor” effect of the U.S. Government providing large scale fiscal and monetary stimulus in the hopes of tiding over the economy during the worst of the COVID-19 Coronavirus (“COVID19”) outbreak. The $2 Trillion fiscal relief package was a record. Record relief served to generate a record relief rally.

However, now investors will have to contend with following “sell the news” phase as there still remain significant “known unknowns” and “unknown unknowns” that will likely serve to keep financial markets volatile. Nevertheless, there is encouraging news in that Congress is already at work on a Round 2 fiscal relief package and The Federal Reserve (the “Fed”) is fully committed to providing further monetary relief, both of which may be necessary should COVID19 containment measures effectively shut down the U.S. economy going into May 2020.

2) In addition to the market movements, we have some very good news out the Fed last week. They unleashed an unlimited QE for pretty much anything and the stimulus bill doubled in size ($1 trillion to $2 trillion) So, does all that justify potentially the best week for stocks since the 1930s?

Thankfully for us all, The Fed following the 2008 Financial Crisis put in place an annual Stress Test to ensure that should a similar financial meltdown occur that the U.S. banking system would be adequately capitalized. Now, instead of a regulatory exercise, the Fed finds itself essentially living in its own simulation.

Relative to a range of metrics, the current downturn is tracking close to levels the Fed had anticipated. For 2Q20, GDP growth is likely to be -10%. The unemployment rate is forecast to hit 6.1%. The yield for 10-year Treasuries bottoming at 0.7%. For corporate BBB bonds, the spread widening out to 550bp by 3Q20. The DJIA bottoms at 16,581 in 4Q20. At the worst close of 2020 on Monday 3/23/20, the DJIA was just 11% away. Not a bad call, in other words.

The Fed has its eye on the ball and investors should be encouraged by that.

3) Thursday’s historic (not in a good way) jobless claims was something for the record books. 3 million claims was essentially 5X the peak of jobless claims during the financial crisis. Was it simply an anomaly related to the virus (mostly restaurant, hotel and other service jobs that will come back) or does this set up for something worse?

Depending on how long it takes to contain COVID19, there are going to be long-term shifts that affect how different sectors perform once the broader economic recovery takes root.

For example, with a constant effort to sustain profitability, corporations will take this time to consider what is the right size of their current employment footprint. The sudden shift to “work from home” leads to a distributed workforce that now no longer needs office space previously used. Considering that long-term leases comprise a substantial fixed-cost, managements may decide shifting to a more distributed workforce is a viable option in light of how well the arrangement performs in the current economic downturn.

At the same time, technology companies who provide the platforms used by this new distributed workforce will see a structural shift in their favor. So, some of what we are experiencing in the unemployment rate is clearly a reaction of shutting down the travel, leisure & recreation service sectors, but there will be a longer-term trend that reflects corporate “right-sizing.”

4) I touched on the Stimulus package at the beginning of the show and while it’s big I am concerned about its true effectiveness. I read a report where an economist tried to gauge how much time the $2 trillion stimulus would buy the economy by using the 2019 total dollar U.S. GDP, which was $21.43 trillion. The $2 trillion figure is about 9.3% of last year’s GDP so he took 9.3% of a calendar year 34 days or just over a month. From a very high level, it looks like the stimulus will “buy” the economy a little over a month of partial shut-down. So if we go back and say essentially the economy began to shut-down on around mid-March (say March 15 for illustration) then that means the stimulus can help offset the loss of growth essentially to late April. That is scary when you realize that the new cases of the virus might not have even peaked in the US by that time. Should we expect another package or was his math wrong?

As mentioned earlier, Congress is said to be at work on a Round 2 fiscal stimulus package. This is most likely to be confirmed shortly as over the weekend federal social distancing guidelines have been extended to Thursday 4/30/20, something that will clearly serve to suppress the U.S. economy into May 2020.

While the Round 1 package had significant relief for businesses, it will be interesting to see if the Round 2 package offers more consumer-oriented measures such as student debt relief. Remember there are elections coming up in November 2020, if not sooner.

Stay tuned.

5) As we bring another episode to a close David, is there any guidance you could offer to our audience as they are trying to navigate these markets? For example, I have been asked a lot recently when is the bottom and when should I start buying and my response has been the only people who really “nail the bottom” are liars and lottery winners.

Nothing moves in a straight line, except perhaps a line drive in the now non-existent baseball season.

We expect markets to be volatile as investors are buffeted by negative COVID19 news reflecting what is truly a global tragedy. Nevertheless, investors should understand that substantial fiscal and monetary relief will continue and not just from the U.S. but from other countries as well. This flood of liquidity should serve to provide a floor under the markets.

That said, there are “unknown unknowns” that have not by their very nature been priced into the market. Should there be a sudden shock from an “unknown unknown” that creates a -15%+ decline (2100 on the S&P, in round numbers), that would fit with the 2008 playbook we have discussed previously. Buying that new low would feel awful, but it would also be a signal to policymakers that they will need to take further steps.

Know that in periods of crisis, capital markets drive policy response.

March 23, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Wealth Management at Laidlaw, discusses the recent market volatility with David Garitty, Chief Market Strategist at Laidlaw.

The topics covered are 1) With the market below 20,000 where might it stabilize, 2) How does this market compare with the 2008 melt down, 3) Did getting rid of the “uptick rule” create more downside volatility, 4) How does algorithmic trading effect the volatility, 5) How will government stimulus for individuals and small businesses help, 6) What are the positives that will give investors confidence.

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Hello and welcome to another episode of “A Brighter Future” Laidlaw & Co’s podcast series. I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am fortunate again to be joined by David Garrity, Chief Market Strategist for Laidlaw & Co.

1) Let’s start with the most relevant market question at this point, with the market down below 20,000 has it discounted enough of the Corona impact and at what level do you think it might stabilize?

Given the speed with which the COVID-19 Coronavirus (“COVID19”) has spread across the planet and the increasing severity of the response to address it, expectations for economic performance in 2020 are being substantially reduced. For example, St. Louis Fed chief James Bullard said 2Q20 GDP may shrink -50%, with unemployment hitting 30%. Morgan Stanley and Goldman also predict an unprecedented plunge. Morgan Stanley sees a -30% contraction, driving unemployment to 12.8%. Goldman already projected a -24% drop and expects global GDP to fall about -1% this year. Note that we had previously mentioned worst-case scenarios could see a hit to global GDP of as -$2.7 trillion, which would represent a -3.1% decline from the 2019 level of $86.6 trillion.

The main questions investors need to consider at this point are: A.) when will the global spread of COVID19 peak?, B.) how quickly can drugs be found to address COVID19?, and C.) can the infection curve be flattened such that available hospital capacity not be overwhelmed? On the first question, the expectation is the global spread of COVID19 should at some point during 2Q20, but possibly extending to 3Q20. On the second question, nearly 70 drugs and experimental compounds may be effective in treating the coronavirus, a team of researchers reported on Sunday night. The list of drug candidates appeared in a study published on the web site bioRxiv. On the third question, the issue here in the U.S. is whether the “stay-at-home” orders issued in a growing range of states will prove sufficient to slow the spread of COVID19. It appears that a 3- to 4-week hiatus may be the period of time necessary to depress the curve.

The bottom line is the economy bottoms in 3Q20 and begins to recover gradually in 4Q20. Given that the stock market tends to move 6 months ahead of the real economy, this scenario indicates a bottom in 2Q20. A look at the last 2 recessions (2000 – 2002, 2017) shows the S&P 500 bottoms at an average of 13x prior peak earnings and 20x current trough. Assuming markets decide 2020 S&P 500 earnings will decline a not unreasonable -30% this year, that puts the floor on the S&P 500 at 2100, a level that represents a further -9% decline from the Friday 3/20/20 close of 2305.

2) In some comments you made earlier in the week you compared the current situation with the 2008 melt down and said we need to keep to our 2008 playbook, can you discuss what you mean by that?

The situation in 2008 was one where the economic downturn required a fiscal policy response (e.g. TARP, Housing and Economic Recovery Act) in order for a floor to be put under the U.S. economy as it dealt with the dislocations in its financial structure from the sub-prime debt market collapse. While the financial system is now thought to be in relatively better condition, there is a fiscal policy response being developed to address the COVID19 recession.

This is a time-consuming process, something creating uncertainty for investors. While COVID19 is a different sort of shock than that seen in October 2008, markets are waiting on the federal government’s fiscal policy response just as in the 2008 Financial Crisis. It is reminiscent, but not in a good way, of the political maxim of “never let a crisis go to waste” that made the rounds at that time.

The 2008 playbook referred to here for the current stock market is to look at the volatility and valuation levels experienced in the S&P500 during the 2008 Financial Crisis and see how they are unfolding in the present environment. If the S&P500 continues to follow its 2008 trajectory, then US equities may try to hold here for a week or two. The holding pattern in 2008 lasted for 10 trading sessions, from 10/9/2008 (close 910) to 10/23/2008 (close 908). Important to note, however, this period was not the bottom for US stocks in 2008, which only came 20 trading days later (11/20/2008 close 752) and -17% below the 10/23/2008 close.

Above all, it is critical that investors do not believe that any equity market stabilization is a sign of an investable bottom in US stocks since history strongly suggests otherwise and we are mindful that 2020 is running the 2008 Playbook at double/triple time. The next flush down could, in other words, be days rather than weeks away.

3) In that interview you also said traders know the adage “never short a dull market” , there have been several articles regarding the “uptick rule” which was removed in 2007. How much effect do you think that has had on this massive volatility on the downside?

The factors that have created the volatility are the underlying fear and uncertainty associated with the impact of COVID19 on the economy which have led to a number of sessions where there is a dash for cash driving an environment where any asset with a bid is being sold. While the market rules around the uptick are important where are left with the view that it is all just rearranging deck chairs on the Titanic.

4) Do these “Algorithms” that more institutions use to trade exacerbate the downside and should the uptick rule be reinstated, or would it even be effective on these days when the market is halted on limit down?

There would be benefit from putting in place measures that serve to dampen market volatility and given more time for human market participants to sort out the current environment. That said, the last thing I think we should see is some form of an extended market holiday in which the stock market would be closed for a number of days. This is an environment where investors need to know that they have the ability to raise funds. Denying the opportunity to have liquidity would only exacerbate panic selling such as we have seen of late.

5) David we have been hearing a lot about actions the Government might take to help individuals and small business owners, which many of our clients are, could you comment on some of those measures and how impactful you think that might be?

The fiscal policy response being crafted may be overly focused on large corporations (e.g. airlines, cruise lines, hotel chains) and not enough on supporting the front-line responders who are addressing COVID19 (e.g. hospitals, specific states). For individual households the prospect of payments totaling $2,000-3,000 will be helpful and should serve to support demand as given the low level of household savings the monies received will very likely be spent.

6) We are obviously in unknown territory here with the Global epidemic, but what do you see as the “positives” that will give investors confidence, help create more stability and opportunities to buy?

Answering the questions spelled out above in Question 1 should serve as guideposts supporting investor confidence and the eventual stock market bottoming process that will unfold. Bear in mind, however, that given the likely long-term shifts in consumer and business behavior from the COVID19 pandemic, there are likely certain sectors that will remain depressed for a long time (e.g. cruise lines, commercial real estate). We will be there to help our clients find the opportunities that result.

March 10, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode Richard Calhoun, CEO of Wealth Management at Laidlaw, discusses current market and geopolitical issues with David Garitty, Chief Market Strategist at Laidlaw.

The topics covered are 1) The current market volatility, 2) Recent economic data, 3) Oil price collapse, 4) Positive outlook for the market and how to proceed, 5) COVID-19 and the healthcare system.

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February 13, 2020 – A BRIGHTER FUTURE, with Laidlaw. In this episode, listen to an interview with David Garrity, CFA and Chief Market Strategist at Laidlaw & Company, 2020 forecasts which offer investors thoughts on five particular areas to take into account when considering how best to navigate capital markets in the year ahead.

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Featured Guest: David Garrity

Chief Market Strategist, Laidlaw Ltd.

Mr. Garrity has had an extensive career in investment research. In 2000, Mr. Garrity was appointed Global Research Coordinator – Automotive at Dresdner Kleinwort Benson. Soon after, he drew media attention during his time at Dresdner Kleinwort Benson, when he put a 1,000 price target on Commerce One (CMRC). The high-profile call marked a turning point in Garrity’s analyst career as he went from Auto Analyst to Technology Analyst. Mr. Garrity is an authority on blockchain technology, highlighting the difference between cryptocurrency and the underlying blockchain.

Interviewed by: Richard J. Callhoun

CEO, Laidlaw Wealth Management

Mr. Calhoun is the Chief Executive Offer of Laidlaw Wealth Management – a wholly subsidiary of Laidlaw Holdings. Previously Mr. Calhoun was the President of a Private Investment Boutique firm in MD/DC Metro market and prior to that was a Managing Director with Well Fargo Advisors Financial Network (FiNet), the Independent Advisor Channel of Wells Fargo Advisors. Mr. Calhoun has also held leadership roles with Smith Barney and Legg Mason. He began his career as a Financial Advisor with Merrill Lynch.

Partner Profiles

These podcasts feature in depth interviews with partners who offer unique investment strategies and services complimenting Laidlaw’s capabilities and offering “ best in class” solutions for our clients.


A BRIGHTER FUTURE, with Laidlaw, in this episode Richard Calhoun, CEO of Wealth Management at Laidlaw and Company discusses thematic investment opportunities with Paul Dellaquila, President of Defiance ETFs. Defiance ETFs were created to take advantage of certain themes which weren’t covered by existing ETF providers. They currently offer three thematic ETFs 5G, Food & Sustainability and Quantum Computing and Machine Learning.

A BRIGHTER FUTURE with Laidlaw, Episode #2 an interview with Robert Holderith, CEO of Green Harvest Asset Management which provides tax beneficial investment products and services. Robert and Ken Mathieson, Head of Laidlaw Asset Management, discuss what makes Green Harvest unique within the tax-loss harvesting space.