Uncategorized, Weekly Update

The New ‘Real’ Economy

Tagged: , , , , ,

Published May 15, 2020


Many articles are being written trying to make sense of a stock market that has roared back from the depths while economic data continues to deliver abysmal news. Part of the explanation focuses on which parts of the stock market have actually rebounded most strongly. It has been the new digital economy stocks that have driven the rebound while the ‘old economy’ stocks have lagged.

The brief below describes a massive change in the ‘real’ economy, one that this pandemic is laying bare. The conclusion being that we can no longer see the ‘real’ economy. This digital economy is taking place in the ether, over the internet, via online shopping, online entertainment, online everything.

Of course, this is a bit of an overstatement as we shelter-in-place and once-burgeoning restaurants are empty, serving almost solely drive-by customers. We will eventually get back out and about.

But the point is a good one. This pandemic is accelerating the shift to the online world. Facebook, Twitter, Google, and others were very quick to shut down their offices, pushing employees to work from home. Their comfort with this remote work environment has only solidified in the past few weeks. This week, those same tech giants told employees they can work from wherever they choose, with only a few required to physically show up at any corporate office. This has been the work environment for some and now will be the future for many more – a remote workplace where Zoom calls are the norm, office space minimal, and the daily commute a matter of feet rather than miles. There are already reports of tech workers migrating away from expensive, traffic-snarled big cities toward smaller towns where they can office from home.

The bankruptcies of ‘old economy’ companies that lived in once-bustling shopping malls are beginning and will no doubt accelerate in the months ahead. The stock market has already shed these companies through their weak valuations while pushing dollars toward the new economy winners.

How much of this pandemic-driven, work from home, play at home world will stick once sheltering restrictions are lifted and people comfortable enough to return to their “normal” lifestyles? That’s a question that will help drive stock prices over the coming months as the economy picks itself up off the mat.

Here’s a brief from Bank of America and Josh Brown talking about the visible shift to the new ‘real’ economy.

“Is the stock market ignoring the real economy? Actually, the stock market is doing its best to reflect the “real” economy. The real economy, however, has moved online. Companies that dominate online business also dominate the stock market’s capitalization with the top five companies accounting for a full 20% of the stock market’s value. And those five companies are all drivers of the online ‘digital’ economy – e.g. Amazon, Apple, Microsoft, Google, Facebook.

This is what the real economy currently looks like now, via Bank of America Merrill Lynch’s credit and debit card spending data. The first chart shows that credit card spending is, perhaps surprisingly, down only slightly from last year. However, online retail purchases have doubled. The second chart shows this shift by category from pre-pandemic levels in February to the present.

Card spending vs online retail

Online spending by sector

The image that many of us have in our heads about what the real economy is supposed to look like – the general store, the barber shop on the corner, the diner with every seat at the counter full, the dress maker, the bakery – it’s a Norman Rockwell trope. It’s not that those businesses aren’t important (they are! they’re America!), it’s that they lack the size and scale to drive a higher correlation between what you see with your own eyes and what the stock market ought to correspondingly look like. The stock market isn’t meant to mirror the economic activity you perceive on your morning walk. Especially now, with people shut inside and forced to transact on screens.

Everything is now taking place away from your eyes, off Main Street, in server rooms and cloud computing facilities you’ll never walk through or greet your neighbors inside of.

Online activity is taking a massive share of all commerce and human attention right now. It isn’t so strange that the companies benefiting most from online activity are seeing their stocks rally in response. It just so happens that those stocks are already the largest and most important components of the stock market’s indices.

This is the real economy now. Paypal has a $165 billion market cap, which is twice the size of Citigroup’s market cap. But PayPal doesn’t have a branch next to the hardware store where you live and Citi might. So it’s jarring. But it’s the truth.”

The collection of stocks below have rebounded very strongly from the March selloff – all drivers and beneficiaries of the transition to the digital economy. The numbers show the stock’s move from the March 23rd market low.

Stock’s move from the March 23rd market low

While these stocks are powering the Nasdaq back near its record highs, the S&P 500 remains stuck under its 200-day moving average (red line below) this week with the ‘old economy’ industrial, financial, and real estate sectors dragging down the broader market.

S&P 500 still under its 200-day moving average

Market Update

Stocks kicked off the week with the Nasdaq adding a sixth straight day of gains. The tech/consumer-heavy leadership index closed up +1% Monday while the broader market was flat. Renewed anti-China rhetoric and uncertainty surrounding the reopening of the nation’s economy kept investors from following through on the prior week’s solid gains. A reappearance of Coronavirus in South Korea and certain Chinese cities has also unnerved investors. Sluggish economic reports out of a mostly reopened China combined with deflationary data in the U.S. to send stocks tumbling -2% Tuesday. Cautious words from Fed Chairman Powell kept investors on the sidelines Wednesday. Battered airline, financial, and energy shares took the brunt of the selling as the broad market slid -1.7%. Buyers waded into the market mid-day Thursday, reversing a morning selloff to leave stocks higher by +1.2%. A strong earnings report from Cisco Systems (CSCO) and buying of beleaguered financial shares helped the market overcome the rocky start. Friday brought another weak start to the trading session. Yet again, another afternoon buying spree pushed indexes back to a positive +0.4% close with investors appearing to shrug off a potentially blockage of semiconductor shipments from Chinese firm Huawei.

Stocks continued running sideways with this week’s -2.11% slip in the S&P 500 (SPY) giving back much of the prior week’s gain. The Nasdaq 100 (QQQ) fared better with a -0.71% dip to hold on to most of its prior week lift. Small cap stocks (IWM) met resistance, tumbling -5.50% after a solid five week recovery run.

Warm wishes and until next week.