July 10, 2020

By: Harris L. Kempner, Jr. President

In trying to determine the economic situation of the United States, it is our opinion that, unfortunately, COVID-19 and the potential “recovery” from it, dominate the picture. We are in the camp that believes that you cannot have a strong ongoing economic recovery without dealing decisively with COVID and its effects. We, in the United States, are not dealing with it.

In fact, in some ways the COVID pandemic is almost out of control at this writing. It’s not just the number of cases that are increasing to levels in the U.S. that have never existed before. Far more importantly in terms of seriousness are the fact that both hospitalizations and deaths are increasing. Those have nothing to do with “increased testing”. Those are the signs of an epidemic that is seriously impacting the life of every American citizen. As a result of that, the three most populated states in the Union – California, Texas, and Florida – representing approximately 30% of the U.S. population, are among those that have some of the most serious COVID increases and problems. This is thus a national matter. Added to this is politicization of the issues with many hoping for a reopening and pushing to reopen the overall economy and schools this fall in the face of a rising pandemic. This could only make this spread worse if they fully succeed. So, despite the exceptional fiscal and monetary measures taken in May and June by Congress and the Fed, we believe the U.S. is now facing a return to extreme economic difficulties. We expect further fiscal measures from Congress in late July or early August before the fall recess and the election. We expect that they and the Feds will continue to be generous with funding. Nevertheless, what we foresee in the economic future of the United States in the next several months is not a “V” shape recovery, but a “W”, with the possibilities that in the late 3rd quarter and possibly in the 4th quarter, the epidemic will outweigh the governmental measures and we probably will be returning to more negative growth. Only an unlikely, rapid vaccine development might change this into a more positive picture.

As far as the overall markets are concerned and the economic response to this, at the moment many economists are looking past what concerns us and indicating that they believe that we will have growth, not just in the 2nd quarter, which is in the books, but during the 3rd quarter beginning July 1st as well. That may be true for the first month or so but we think that by September, as stated above, we will be seeing a significant slowdown in the U.S. economy. This means that many present earnings estimates will be called into question. In our portfolios, we are gradually raising funds as selling points in individual stocks that appear ahead of themselves and we presently expect to continue that during the next several months. We are finding very few buys at these levels.