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Kuby’s Commentary

The Economic Gloom Vaccine Fervor Pendulum Swings

May 18, 2020

Last Week:

Every Saturday morning I settle in with my cup of coffee and read the New York Times and Barron’s. This past weekend each had a headline that when put together clearly painted the picture of the surreal state of the world.

The NYT business section digest headline reads “Gloomy Week as Investors Assess Economy”. The parade of bad news continued as expected, with industrial production plunging 11.2%, manufacturing output 13.7%, and retail sales 16.4% in April; all representing record declines. Adding to the gloom were comments from Dr. Anthony Fauci and Fed chair Jerome Powell. Dr. Fauci warned of the possibility that an overly rapid reopening of the economy could reignite the COVID-19 outbreak, while Chairman Powell cautioned about the serious long-term consequences of the deep economic downturn. The latest weekly update showed nearly 3 million more Americans applied for unemployment benefits, raising the total jobs lost to 36 million in the last two months. Gloomy indeed!

The cover of Barron’s reads “VACCINE. The global economy depends on it.”

Amen! I think we are all relying on the scientists to save us from the current very uncomfortable new normal. The remarkable advancements in medical research engender optimism in me, but the long list of my disappointed science teachers would probably question my authority to offer an opinion. Seems like science class was always before lunch or basketball practice, so it was hard to pay attention back then, but now it’s hard not to pay attention. Based on this new-found fixation on virology, I also embrace the concept of herd immunity and the development of therapeutics to treat the symptoms of the disease. I do believe that the substantial rebound in the market from the March lows suggest that investors share that optimism that this gloom will ultimately lift.

Nevertheless, reopening fervor fizzled and the stock market had its worst week since the week ended of March 20 with the S&P 500 declining 2.3% and the Russell 2000 diving 5.6%. Small cap stocks have had an extraordinarily difficult year, as investors remained concerned about the ability of those less well capitalized companies to survive this economic downturn.

When the gloom lifts, look for a nice rebound by this historically outperforming asset class.

We never had much interest in gold at North Star until earlier this year. That changed when Professor Robert Z. Aliber, our trusted economic consultant, suggested that gold could be the winner in the sea of global currency debasement. For the week the yellow metal advanced 2.4%, taking its gain for the year to almost 15%.

The printing presses are spewing out currencies around the world at an unprecedented pace, perhaps gold could be a safe haven store of value?

The yield on the Ten-Year Treasury slipped 4 basis points to 0.64%. Every time I quote the yield it feels like a number is missing to the left of the decimal point.

This Week:

COVID-19 will continue to be the primary story line. All of the States except Delaware, District of Columbia, Illinois, Michigan, and New Jersey have reopened their economies in a variety of fashions, leading to real-time information on the effect on spread of the coronavirus by those policies. There will also be data from the progress of developing therapeutics, and vaccine updates.

The tone Monday morning turned quite positive after biotech company Moderna reported that a phase one study of a vaccine candidate shows it might work. The study showed that two doses of its vaccine elicited an immune response that is similar to what has been seen in people who have recovered from COVID-19. The Barron’s article over the weekend highlighted Moderna as one of the “hares” that could bring a vaccine to the market with extraordinary speed. This program is using a molecule called messenger RNA to make pieces of SARS-Co-V-2, the virus that causes COVID-19, inside your body, rather than in a lab. Moderna says it aims to produce one billion doses of its vaccine a year, and will be able to produce millions of doses a month later this year. We are not recommending shares of Moderna (MRNA), or overstating our understanding of the science (see my earlier comments about that skill set), but this development supports our confidence in the scientific community. The early-read positive news from Moderna’s phase one study seems quite consistent with Fed Chair Jerome Powell’s comment on 60 Minutes last night that it is not a good idea to bet against American innovation and resilience.

The economic calendar is light with existing-home sales expected to plummet and the Leading Economic Index for April forecasted to significantly decline after a record drop in March.

Final Thoughts:

“You‘ve got to accentuate the positive
Eliminate the negative
And latch on to the affirmative
Don’t mess with Mister In-Between
You’ve got to spread joy up to the maximum
Bring gloom down to the minimum”

Lyrics by Johnny Mercer

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