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Greenfield's Point of View - September 2020

What’s With the Stock Market?

U.S. stocks wrapped up a banner month, with the S&P 500 posting its best August in more than 30 years. The Standard & Poor’s 500-stock index capped a remarkable five-month winning streak as improving labor data, central bank maneuvers and Big Tech’s continuing dominance helped fuel a succession of milestones on Wall Street, even as the wait continues for a coronavirus vaccine and full economic recovery. The month’s advances propelled the S&P 500 to record levels, ending the shortest bear market in history (after ending the longest bull market on record). The Nasdaq also set an all-time closing high and the blue-chip Dow is now in positive territory year-to-date.

A Tale of Two Economies

Stocks may have recovered, but 28 million people are collecting unemployment benefits. New home construction is booming, but an eviction crisis is looming. Retail sales have rebounded as consumers come to terms with online shopping and curbside pickup, but airlines are shutting down service to midsize markets as demand stalls at about a third of normal capacity.

And it is still unclear how much help Americans can expect from the federal government. President Trump’s extension of $300 in weekly benefits for those out of work isn’t a sure thing, as many states have been slow to apply for the funding. So whether the jobless will receive $300, $400 or nothing at all depends very much on the state in which they reside.

For many, the stock market and economy appear increasingly disconnected. Part of the reason for the divide: The share of Americans who own stock, either directly or through retirement or mutual funds, is falling, and stock ownership is increasingly concentrated among a sliver of the population. The top 10% of Americans by wealth owned 87% of all stock outstanding in the first quarter, according to data from the Federal Reserve. That share has grown over the past decade, from 82.4% in 2009. The stock market has surged over that period, with the S&P 500 more than quadrupling from its low during the financial crisis in March 2009.

The stocks of Apple, Amazon, Alphabet, Microsoft and Facebook, the five largest publicly traded companies in America, rose 37 percent in the first seven months this year, while all the other stocks in the S&P 500 fell a combined 6 percent. Those five companies now constitute 20 percent of the stock market’s total worth, a level not seen from a single industry in at least 70 years. Apple’s stock market value, the highest of the bunch, reached $2 trillion — double what it was just 21 weeks ago.

The tech companies’ dominance of the stock market is propelled by their unprecedented reach into our lives, shaping how we work, communicate, shop and relax. That has only deepened during the pandemic, and as people shop more frequently on Amazon, click on a Google or Facebook ad or pay up for an iPhone, the companies receive a greater share of spending in the economy and earn ever larger profits. This is why investors have flocked to those stocks this year at the expense of the scores of companies struggling through the pandemic, and are betting that their position will be unassailable for years.

Q3: The Best Quarter of Economic Growth. Ever.

For Q3 2020, gross domestic product is expected to post its best quarter on record. Morgan Stanley is tracking a 21.3% annualized gain for the period, IHS Markit 20.1%. The estimates are obviously quite preliminary, but anything close to that would handily beat the previous post-World War II record of +16.7% in 1950.

Unfortunately, a 20% jump won’t be nearly enough to retrace losses from the first and second quarter. IHS Markit sees third-quarter GDP around an annualized $18 trillion, well short of its fourth quarter peak. So even with a big third-quarter bounce, the coronavirus would still have wiped out about three years worth of gains.

The SPACs Keep Coming

Blank-check companies and electric vehicle startups seem to be a match made in dealmaker heaven. Canoo is set to merge with Hennessy Capital Acquisition Corp. IV, following in the footsteps of electric vehicle specialists Nikola, Fisker and Lordstown Motors, which have also recently inked deals with special-purpose acquisition companies (SPACs). Canoo's electric vans will debut in 2022 with a monthly subscription model.

In more traditional IPO news, five unicorns filed in the last week of August for Wall Street debuts. There are about $44 billion worth of startups now planning a shift from private to public. All seem to be eager to strike while the iron is hot, hitting the public market while stocks are booming and before the uncertainty of the US election sets in. And to varying degrees, all are businesses have benefited from some of the changes brought on by the pandemic.

The Housing Market

U.S. new-home sales rose to the highest level since the waning days of the housing bubble, underscoring a strong recovery for the housing market as people search out more space while working and schooling at home. Sales of new single-family houses reached an annual pace of 901,000 in July, up almost 14% from the prior month and the highest overall level since December 2006. While growth appears to have eased in other sectors of the economy last month, housing is still going strong. That's likely to generate positive knock-on effects, starting with construction employment and running through demand for lumber, appliances and furniture.

But good luck finding your dream home. While demand is up, supply is down. The monthly supply of houses available for sale matched the lowest level since 2013. And people’s realization that they can work from anywhere during COVID-19 office shutdowns have led to bidding wars for homes in some remote areas of the West.

Consumer Health

A hot housing market appears to be cold comfort for many Americans. Consumer confidence fell for the second straight month in August as business and employment conditions deteriorated. Concerns about the economic outlook and financial well-being of households will likely cause consumer spending to cool in the months ahead. The still-widespread incidence of COVID-19 infections is undermining confidence, and the expiration of federal unemployment benefits is also dampening spirits.

New unemployment filings remained level in the last week of August, hovering just above 1 million. The unemployment rate is scraping double digits at 9.9 percent.

When unemployment soared this spring at the start of coronavirus lockdowns, credit-card debt and delinquencies were widely expected to surge. Instead, amid the deepest economic crisis since the Great Depression, credit-card debt in the U.S. and other advanced economies has fallen. Fewer people are late on their credit-card payments. Consumer demand for new borrowing—through credit cards, personal loans and even pawnshops—is down sharply. The main reason is government stimulus programs launched in the U.S. and other advanced economies that have worked unexpectedly well. The flood of money, along with debt-relief measures such as deferred-mortgage and student-loan payments, has stabilized the finances of many households and even left some in better shape than before the pandemic—at least for now.

Thousands of furloughed workers are being told they won’t be coming back as companies brace for years of pandemic-related disruption. MGM Resorts and Stanley Black & Decker recently told some employees furloughed at the outset of the coronavirus pandemic that they wouldn’t be put back on the payroll. And companies bringing back the majority of furloughed workers, including Yelp and Cheesecake Factory, are making reductions as they adjust to the new reality that many coronavirus-related closures won’t be resolved this fall. More fresh layoffs at big employers loom.

Economists say the new layoffs reflect a shift in corporate thinking toward a more protracted crisis. Companies that thought they could either cut wages temporarily or cut costs temporarily or hold on are now finding out that the weakness of the pandemic is now longer than they hoped.

U.S. consumers boosted their spending in July, but more slowly than in prior months as new coronavirus infections rose and the expiration of enhanced unemployment checks loomed. Overall consumer spending remained 4.6% below February’s pre-pandemic level. The great divide: goods vs. services. Americans are buying cars and household goods, but not airline or movie tickets.


It's tough gauging new car volumes now that most automakers have abandoned monthly sales reporting.

A better gauge may be the seasonally adjusted annual sales rate. Cox Automotive pegs it at 14.9 million; J.D. Power/LMC put it at 15.1 million. Either way, that would mark the fourth straight month of recovery following April's pandemic-low of 8.6 million.

The dynamics suppressing new car sales includes a lack of new-vehicle inventory and worries about consumer willingness and ability to buy.

Provided automakers can ramp up production to meet demand in the fourth quarter, sales may get back to zero percent change in monthly sales from a year ago by the end of 2020. But, business shutdowns and job losses this year have damaged the U.S. economy and consumer confidence so badly it could be three or four years before auto sales recover to pre-pandemic levels.

Inventory is a major problem for both new- and used-vehicle sales. The recent drop in new-vehicle sales, and a decrease in the percentage of new vehicles being leased, means fewer trade-ins today, and fewer nearly-new used vehicles three years from now, which is going to mean fewer vehicles running through the wholesale auction channels.

One note of optimism: lease customers who have been extending their leases during the pandemic represent additional pent-up demand, when they eventually return to the market.

The big question is if, with businesses running more efficiently with fewer people, less office space and less travel, all these furloughed employees are going to become permanent layoffs. If so, consumer demand for vehicles may remain suppressed for some time.

Fewer Trips; Fewer Miles; Fewer Cars

A recent KPMG study estimates that the combination of working from home and increased adoption of ecommerce for shopping will mean a 9%-10% reduction in miles driven, post COVID-19. This could reduce the vehicles in operation by 14 million. This could mean fewer car sales, fewer replacement parts and aftermarket sales, and lower gas tax receipts for states. On the flip side, this may mean an increase demand for delivery vehicles. Which can benefit startups working on innovative delivery van designs, new powertrain systems and autonomous capabilities.

But there are countervailing reasons that miles driven might increase. For safety reasons, more commuters might switch from public transit to private cars, and more Americans could move to the suburbs -- and thus have longer commutes.

Hope Amidst the Chaos

Let’s all keep in mind that there are eight coronavirus vaccines in Phase III trials, according to The New York Times. Fingers crossed…

If you’re an early stage automotive technology company that needs help either raising money or thinking through your exit, please reach out. I’d be honored to help you think through potential scenarios.

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