17 Jul 2020 How Do We Make Sense of This?

Earlier this week I came across this chart and the story it tells is staggering. What you see is the year-over-year change in what JP Morgan considers “High Frequency Activity,” things like driving, eating out, flying, staying in hotels. Look how quickly and severely activity just stops. Almost overnight restaurant activity was down 100% from the prior year, air travel was down 96%, and hotel occupancy was down 69%. Restaurants and air travel are still down over two-thirds and hotel occupancy remains off by 30%.

As I was getting ready Thursday morning to start on today’s brief, this headline flashed across the CNBC website:

Homebuilder sentiment increasing is bullish, yet it’s hard to make sense of it considering the number of jobless claims and recent data that 30% of renters missed their payments in June.

We are in the midst of corporate earnings season, and despite all the bad news, stock valuations, in aggregate, are as high as they’ve been in 20 years. It’s widely expected that earnings over the next few days will be terrible, yet stock prices remain buoyant.  Look at the chart below: earnings across the S&P 500 are expected to drop by 44% this quarter.

So here we have it: restaurant, air travel and hotel activity is still far off the highs, and homebuilders, who three months ago felt terrible, are now ebullient. Renters are missing rent, earnings are expected to be dismal and the stock market has mostly recovered for the year. What gives?

This graphic may help:

Focus on the top row (“S&P Weight”) and the fourth row down (“YTD”). Oil prices get a lot of attention and, as you can see, the energy sector is down 34.5% through June, but as far as the stock market is concerned it’s a non-factor because energy only makes up 2.5% of the S&P 500. Technology, on the other hand, makes up more than 1/4^th of the market and is up 7.3%. That seems to be the story.

For better or worse, the stock market is being carried by the likes of Amazon, Netflix, Apple, and Microsoft, among other tech behemoths. The worst performer among those four through July 15^th is up 29.5%. Yes, the economy is not doing well but some of the largest contributors to the S&P 500 index (Microsoft, Apple, and Amazon together make up more than 15%) are thriving.

It’s as important now as ever to remember that you aren’t investing in the economy as it’s currently performing. You are investing in the stock market, which among many other things, is concerned with how the economy will look in the future. It’s a subtle difference (and one that makes me a bit uncomfortable given the suffering that’s taking place throughout much of the country) but an important one.

It’s important to remember that, despite all the media noise, the economic releases, and the forecasts; at the core of it, you are investing in human enterprise and ingenuity. The market is a collection of well-capitalized companies run by smart, motivated, and creative people who find new ways to make profits no matter what economies, wars, and governments throw at them. You aren’t investing in a collection of companies as they are currently performing. Rather you are investing in the future earnings of tomorrow’s leading companies without having to guess who they are.