August 3, 2020 — Tailored Brands filed for bankruptcy (they own Men’s Wearhouse and Jos. A Bank). In June, they laid off 20% of their office staff. Now they will close 500 stores and layoff thousands more. Yes, they had a flawed business model (“buy 1, get 1 free” means that you will take twice as long to buy another suit). But for whatever the reason, they now join the ranks of Ann Taylor, Brooks Brothers, GNC, Sur La Table, Hertz, JC Penney, Neiman Marcus, J Crew, Gold’s Gym, Modell’s and Pier One – just to mention a few bankruptcies filed so far this year. Combined those companies laid off a tremendous number of workers.
On Friday, Apple stock jumped 10% growing even closer to the sky. The company added $170 billion to its market value in one day. For perspective, that is more than all of McDonald’s or Nike stock is worth and 2/3 of JP Morgan Chase – in one day. As more companies declare bankruptcy, I wonder how many of those unemployed people will be buying the new I-phone 12 model when it comes out in September? Don’t get me wrong, Apple is a great company but the market might be anticipating more growth than what Is possible given where the economy is.
In the 2nd quarter of 2020, US GDP fell 33%. The Atlanta Fed is forecasting 3rd quarter GDP to rise by 11.9% and Bloomberg economists are saying it will be 18%. Remember, a drop of 33% requires a subsequent increase of 50% to get back to even.
So, to get back to where we were in February the US economy must grow by 50%. Even at 18% growth per quarter, it will take 8-9 months. The S&P is already back to 96% of its February high, the economic recovery has been nowhere near that. That was made possible by a $2 trillion stimulus package provided by Uncle Sam. We going to need a lot more – how much more will depend on how soon a vaccine becomes available.
Over the past 15 years, the flu vaccine has been only 40% effective. That vaccine is modified each year as the flu virus mutates. After decades of studying and modifying the vaccine, it still is only 40% effective. How effective should we expect a COVID vaccine to be when they roll it out after rushing through the trials?
A recent survey by the Pew organization shows that only 64% trust the CDC about COVID. 30% trust President Trump. I’d bet even fewer people trusted him enough to take hydroxochloroquine, which he claims to have taken. And I doubt most people will trust a newly tested vaccine enough to put it into their bodies. Personally, I found that, while it is inconvenient, wearing a mask and practicing social distancing seem to work well enough. I suspect that even after a vaccine is available, it will take a long time for the economy to get back to where it was in February. But even with a vaccine, those stores are closed for good.
While that sounds terribly depressing, it won’t last forever and meanwhile we remain cautious in the markets, which I think is the prudent approach.
If you have any questions about your portfolio or financial plan, please contact us.