Saturday, October 24, 2020

THINK STRATEGICALLY: 2nd Quarter 2020 MRI

By on July 6, 2020

2Q MRI to gauge market, economy’s health

While it may seem as if a lifetime has gone by, we are only six months into 2020. Here in Puerto Rico, we have had earthquakes during the coronavirus pandemic—enough to create a significant crisis. However, our job here is to examine the health of the economy and markets and provide guidance that will help to make informed decisions.

The year-to-date (YTD) performance of the four indices we follow:

  • Dow Jones Industrial Average: -9.5%.
  • S&P 500 Index: -3.1%.
  • Nasdaq Index: 13.8%
  • Birling Capital Puerto Rico Stock Index: -28.87%. 

The Dow, S&P and Birling Capita indexed reflect negative YTD returns, whereas the tech-heavy Nasdaq has a solid 13.8% return. For the wise investor, these indicators do not even begin to express the narrative of these first 180 days of 2020.  

The year 2020 has had:

  • Record-breaking stocks levels
  • The death of the bull market
  • A global pandemic
  • The fastest and biggest recession since the 1930s.
  • The most significant contraction caused by an exogenous economic shock. 

With so much happening during the first two quarters of 2020, one could think that the worst is behind us, but it may be ahead. We do not know. What we do know is that investor sentiment favors the reopening of the economy, even while there are signs that the pandemic may be worsening in 40 out of 50 states. So what should we expect during the second half of 2020? Here is our MRI.

Economic Recovery, or Not

The coronavirus pandemic pushed the U.S. economy into a recession, killing a more than 11-year year economic expansion—the longest in history. Real U.S. gross domestic product (GDP) growth fell to minus-5%, compared with 2.1% last quarter and 3.1% last year, for one of the top 10 most significant declines since the 1930s.

We note how some of the critical benchmarks of the U.S. economy have improved and began to show significant signs of growth or progress. 

  • Initial applications for unemployment have been lower for three weeks.
  • Unemployment rate fell to 11.1%, from 13.3% the previous month, a decrease of 16.5%. 
  • Home sales rose 17%, to 676,000.
  • The University of Michigan Consumer Sentiment Index report reflects a rise in the United States: 78.1 in June, compared with 72.3 in May. 
  • U.S. ISM Manufacturing PMI rose to 52.6, up from 43.1 last month, a rise of 22.04% .

No one who has bet against the U.S. economy has ever won; we predict that while the economic recovery is still nascent, the rebound will continue, even as in some areas, there will be a resurgence of coronavirus. While we do not see the economy reaching pre-pandemic levels until 2021, the economy is positioned for continued growth. However, we must mention that we do expect the highest bankruptcy levels in the United States since the 1930s, with many well-known brands filing for chapter 11 protection. We note particular weaknesses in those businesses with high leverage levels and those in profoundly impacted sectors such as tourism, retail, restaurants and food service, luxury goods, auto suppliers, and businesses with weak balance sheets. 

Labor Market 

U.S. unemployment swung from an all-time low of 3.5%  to 14.7% in less than 60 days after the nation was forced to shut down the economy to halt the spread of the coronavirus pandemic.

After losing 22 million jobs, the jobs report last week showed that the economy added 7.5 million jobs between May and June, and unemployment fell to 11.1%. 

We note that two of the biggest industries impacted by the shutdown were able to add jobs. The tourism Industry added 2.1 million and retail added 740,000; this translates to 38% of the total job growth, a promising prospect. Another sign to be vigilant of is consumer spending, as it represents 70% of the GDP, and the improvement in the labor market will be critical for the overall economic recovery. 

Week in markets: Best 2nd Quarter in 20 Years—Double-Digit Returns

The U.S. stock market ended the shortened holiday week on a high note. We also note that the second quarter was the best performing in almost 20 years, as all indices saw double-digit growth. The quarter performed as follows:

  • Dow Jones Industrial Average: up 4,869.37, or 23.25%.
  • S& P500: up 629.79, or 25.49%.
  • Nasdaq: up 2,698.19, or 36.66%.
  • Birling Capital Puerto Rico Stock Index: up 319.08, or 28.21%. 

We must give a big round of applause to the Federal Reserve and the U.S. Congress for acting decisively to avert a more profound economic impact. Their timely actions surpassed those of the great financial crisis. However, we must caution that the combination of the new wave of coronavirus infections in the southern and western U.S. may impact the better-than-expected economic news, even though as it evidences that an economic recovery is taking hold. Economic improvements are marathons, not 100-meter races, so we must be ready for the unexpected with many issues in play. 

On to the markets, the Dow Jones Industrial Average closed July 2 at 25,827.36, a gain of 811.81 points, or 3.25%, and a year-to-date (YTD) return of 9.5%. The S&P 500 closed at 3,100.29 for a gain of 90.79, or 3.03%, and a YTD return of minus-3.1%. The Nasdaq closed at 10,207.63 for an increase of 450.41, or 4.62%, and a YTD return of 13.8%. The Birling Puerto Rico Stock Index closed at 1,449.53, rising 65.2 points, or 4.72%, and yielding a YTD return of minus-28.87%. Meanwhile, the U.S. Treasury’s 10-year note closed at 0.68%, a change of 6.25%, and YTD return of minus-1.3%. The U.S. Treasury’s 2-year note closed at 0.16%, a change of minus-5.88%, and a YTD return of minus-1.35%.

The Final Word: Birling Puerto Rico Stock Index Performance from Jan. 1- June 30

The Puerto Rico Stock Index (PRSI) is a market value-weighted index, composed of five companies based and having their principal place of business in Puerto Rico. All companies are traded on national stock markets NYSE, AMEX, or NASDAQ. 

The PRSI includes the following institutions, ranked according to their performance from Jan. 1 to June 30. 

  1. Triple-S (GTS) closed June 30 at $19.02, achieving a return of 2.87%, beating both the Dow Jones and Birling Capital PRSI.
  2. Evertec Inc. (EVTC) closed June 30 at $28.10, and delivered a total return of minus-17.45%, which beat the Birling Capital PRSI.
  3. Popular Inc. (BPOP) closed June 30 at $37.17, with a minus-36.73% yield, lagging behind the Dow Jones and the Birling Capital PRSI. 
  4. OFG Bancorp. (OFG) closed June 30 at $13.37, for a minus-43.37% return, lagging behind the Dow Jones Industrial Average and the Birling Capital PRSI. 
  5. First Bancorp. (FBP) closed June 30  at $5.59, for a minus-47.21% return, lagging behind the Dow Jones Industrial Average and the Birling Capital PRSI.

Francisco Rodríguez-Castro, president & CEO of Birling Capital, has more than 25 years of experience working with government, and multinational and public companies.

Think Strategically is a publication prepared by Birling Capital LLC and is a summary of recent geopolitical, economic, market and other developments. This report is intended for general information purposes only, is not a complete summary of the matters referred to, and does not represent an investment, legal, regulatory, or tax advice. Recipients of this report are cautioned to seek appropriate professional counsel regarding any of the matters discussed in this report.

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