A Quick Review of Fundamentals

I just wanted to take a moment to provide some important economic metrics given the truly unique environment the nation finds itself in right now.

I will provide an overview of:

  1. Sharp rebound in retail sales
  2. Projected national deficit
  3. Unemployment
  4. Economic growth projections for Q2
  5. Corporate debt
  6. Bankruptcies
  7. Market valuations

Retail Sales

Retail sales rebounded sharply in May producing the greatest jump ever.

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National Deficit

The national debt recently topped $26 trillion as we added approximately $1 trillion in both April and May. The congressional budget office is projecting a $3.7 trillion deficit this year more than doubling the prior record of $1.4 trillion set in 2009.

Unemployment

After accounting for the BLS’ methodology error recently, the unemployment rate is likely somewhere between 17% and 20%. To put this in perspective, the peak unemployment rate during the Great Financial Crisis was about 10% so the current recession is more on pace with the Great Depression, which saw about a 25% peak unemployment rate.

GDP

The Atlanta Fed is now projecting GDP to be cut in half in this second quarter of 2020.

Corporate Debt

Corporate debt is approaching 50% of GDP, which is a record amount exceeding both the dot-com bubble and great financial crisis peaks. Meanwhile, “zombie” companies are also at a record high. Zombie companies are companies whose debt servicing costs exceed their profits.

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Bankruptcies

Bankruptcy filings are rising at the fastest pace since 2009. There is likely to be more pain here. Recall that I’ve largely avoided corporate bonds precisely because I was concerned about solvency issues.

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U.S. Stock Market Valuations

And, of course, even with all this going on, the U.S. stock market continues to trade near all-time high valuations. This implies real (i.e. inflation-adjusted) returns for U.S. stocks over the next decade are likely to be very low.

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