If you could transport yourself back to late March, you’d be buying stocks hand over fist.
Or at least if you were allowed to retain your knowledge of the future. And if we also assume your actions, guided by foresight no one else possesses, wouldn’t alter the course of a history you’ve already lived once.
Before we get too far down the wormhole, the point is simply to say that US equities had their best quarter since 1998 in Q2. It’s one of the more astounding reversals in market history when considered in the context of what at least some believe will prove to be an interminable biological threat.
Of course, whether or not “interminable” turns out to be the right adjective depends on the vaccine push. Suffice to say not everyone is convinced this is going to have a happy ending from a public health perspective. And perhaps not from an economic standpoint either.
While the immediate threat is a deflationary spiral, some worry the longer-term menace is the return of inflation, as the combination of i) unprecedented stimulus, and ii) geopolitical shifts including a reinvigorated de-globalization push, will usher in an era of sharply rising prices. Policymakers may or may not be prepared for that.
In the near-term, market participants will focus on the juxtaposition between observable structural damage and improvements in the incoming data. Perhaps nowhere is that juxtaposition more stark than between the series of upside “surprises” on a variety of key indicators and the mounting number of bankruptcies in the economy.
I’ve talked at length in these pages about the bankruptcy story, and you should note that it’s a multi-faceted debate. There are myriad issues to sort through, including, for example, the difficulty inherent in parsing Chapter 11 filings (see: “Chapter 11 Bankruptcy Filings Just Surged 168% In One Week. Here’s Why…“)
But abstracting a bit, and looking solely at filings for firms with liabilities of at least $50 million (as Bloomberg does), the second quarter of 2020 was the second-most harrowing stretch on record. There were 75 filings among such companies, matching Q2 2009.
The first quarter of 2009 had nearly 100 such filings.
Retailers are going bust faster than ever. If you break the numbers down by sector, as Bloomberg’s Jason Crombie does in a great piece out Tuesday, the first half of 2020 saw 16 retailers with liabilities of at least $50 million go bankrupt.
That’s more than the comparable period in 2008 and 2009.
In energy, bankruptcies are piling up nearly as fast as they did during 2016’s oil price collapse.
“Chesapeake’s insolvency highlights risk lurking in the shale sector, which remains under pressure from weak global demand”, Bloomberg’s Crombie writes, on the way to noting that “almost a third of US shale producers are technically insolvent with crude at $35 a barrel”.
Needless to say, the doomsayers among you will contend this is “only the beginning” and that a “wave” of credit events is lurking in the back half of the year.
If that’s you, you could certainly end up being right.
Indeed, we may yet break 2009’s record for the full year (figure above).
But, don’t underestimate the power of the printing press — or the will and resolve of the guy manning it.