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Too Soon to Tell: Is the Rise of Capital Markets a Sign Things are Coming Back?

Washington, DC (May 28, 2019) --- Political consultant and pundit James Carville’s battle cry, that

James Carville. Photo Credit: Simon & Schuster

“it’s about the economy, stupid,” was a mantra that helped Bill Clinton get elected in 1992. Indeed, the American voter always seems to have one hand on their wallet as they enter the ballot box.

Today, as the chairman of a Mergers & Acquisitions Advisory Services firm, colleagues, clients and folks in passing want to know what I think about today’s economy. As an investor myself, and as someone who sits on a number of corporate and non-profit boards, discussions about investment strategies and public markets are commonplace in my world.

In March, as the Covid-19 pandemic was sweeping across America and the world, I wrote a story predicting that we’d rebound from the steep drop in markets within 90 days. As the Dow opened this morning, we have crossed the 25,000 threshold, and are moving toward a higher moving average.

While it may take some time to get back to last February’s 29,000 Dow territory, the reality is that stocks, in particular the NASDAQ and Russell indexes, have come back much faster than many folks predicted. Even with unemployment now hovering close to 39 million or more, America’s financial resiliency remains steadfast.

The actions taken by Congress and the Administration helped to curtail short-term concerns, and helped restore confidence in large companies as measured by their buoyant stock prices.

But, we’ve still got a long way to go before a full-bore recovery is in place.

Many small businesses are suffering. And indeed, the so-called leisure industry --- hotels, restaurants, airlines, cruise lines, amusement parks, etc., --- have been hit hardest in this pandemic period. Also, the retail sector has also suffered, with brands like JC Penney, J. Crew, Victoria’s Secret, Laura Ashley and others either declaring bankruptcy, or notifying shareholders of reorganization attempts to try and re-emerge with trimmed up balance sheets. Many shopping malls have been closed, and others are offering very limited retail access, mostly through online sales with in-store pickup.

The auto industry has seen a rapid decline in new car sales. Hertz, the car rental giant, has declared bankruptcy. Airports are ghost towns, and mall-like shopping complexes inside the airports -- including retail shops, bars and restaurants and bookstores -- have also been forced to close.

At the Baltimore airport last week, a colleague reported that the place “was empty.” He said, “I was looking to grab a bite before my flight, and there were only two spots in the Southwest terminal to get food.”

Media companies, technology firms, aerospace concerns and construction companies have also been hit, with large layoffs announced. Layoffs at The New York Times, Conde Nast, NBC, and at also newspapers and radio stations across the country are real. Salaries are being cut back, people have been let go, and more may be on the way.

The financial services industry has been hit, but is starting to show some signs of recovery. Though most M&A activity has come to a grinding halt, there are now starting to see signs that companies want to resume the discussion of either selling or buying businesses again. We project that 3Q’20 will be a strong one, and that financing for firms seeking M&A activities will begin to become normalized again.

Indeed, my phone has lit up during the last month, primarily with Private Equity investment companies seeking deals. Yes, there are some who are seeking “bottom-feeder” opportunities. Clearly this pandemic is creating many scenarios where marginally performing companies (before the crisis) simply can’t make it with the economic downturn. And, as noted above, bankruptcy courts are going to be busy for the next two years.

A lawyer in Tampa spoke to me recently, and said she was “gearing up” her marketing efforts to support her firm’s bankruptcy practice group. “We’re seeing a lot of clients seeking bankruptcy protection. We expect to be very busy,” she said.

Meanwhile, the residential real estate business is also going through interesting times, fueled by historically low interest rates. A piece from Coldwell Banker recently projected 30-year fixed mortgage rates falling below 3.0% in the next six months. This, and very low inventories of available homes nationwide, are driving up the price of single-family homes.

How much longer this bullish housing market will last is anyone’s guess, but Treasury Secretary Steve Mnuchin told NBC last week that one way he was able to “sell” congress on the CARES relief bills was to say that, “bank rates are nearly at zero, so it is very affordable to borrow money at this time.” So, it’s likely mortgage rates will also stay low for the short-term, if not go lower before year-end.

And, then there are the digital economy companies, like Apple, Facebook, Amazon, Zoom, Netflix and others who are crushing it as Americans have been limited to staying home. Wal-Mart and Target have also done well, mostly because they have grocery stores inside their “Big Box” retail locations. But also because Amazon and Wal-Mart have advanced online retail capabilities, they’ve weathered this storm well.

One analyst told CNBC last week that he expects TJ Maxx and Marshall’s to do very well this summer, since spring clothing lines didn’t move in traditional retail, so they’ll be selling them at discount stores instead at reduced prices.

Still, uncertainty remains a genuine issue for many Americans. Even as the stock market and investors have recovered fairly well, it’s likely most American investors will end the year on a slightly down note, probably in the 1-3% decline range. For retirees, pensioners and fixed income folks, that’s nothing like the last few years of 7-15% growth.

And, other reports are now showing that perhaps 20% of those Americans who have lost their jobs may not be rehired. Many CEOs are hoarding cash on company balance sheets. They’re re-trenching, cutting dividends, but also consolidating back office and general operating costs during this period. That trend is likely to continue for the foreseeable future, until well into 2021, as the general economy slowly returns to normal.

This overall short-term gloom will have profound effects on the overall economy, which in turn will also influence voters this fall. With at least six swing states looking at possible shifts in power in gubernatorial and state senate and house races, it now appears, as of this writing, that Pennsylvania, Wisconsin, North Carolina and Maine may move to the left. No doubt the economy is driving much of this, so is the Trump Administration’s handling of the overall pandemic crisis.

Either way, Americans vote with their pocket books. And while the stock market is climbing, at least for now, there’s no question 2020 will be an historically bad year for investors and corporations overall.

Usually, a down economy means change is coming. Either way, that’s probably a pretty safe bet.

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Randy Coppersmith is a writer/editor with Words Matter. He started his career as a reporter, copy editor, sportswriter, news reporter, section editor, and political columnist for newspapers in Missouri and Florida as well The Associated Press. Today, he is also the chairman of Cortland Advisors, LLC, a financial investment and consulting firm and is a director on a number of corporate and non-profit boards, including the media production company, Re-Group, which produces The McLaughlin Group. Randy lives outside of Washington, DC, in Northern Virginia.

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