CAPE TOWN, SOUTH AFRICA – MAY 12: People with face masks seen at a South African Social Security … [+] Agency (SASSA) building on May 12, 2020 in Cape Town, South Africa. The South African goverment announced that a R350 grant to help unemployed people not receiving any form of subsidy or grant during the Covid-19 pandemic would be paid from May to October. It will be open to South Africans, refugees and permanent residents already in the Department of Home Affairs’ system and those residing within the borders of South Africa. (Photo by Nardus Engelbrecht/Gallo Images via Getty Images)
Gallo Images via Getty Images
In October 1980, then presidential candidate Ronald Reagan asked a good question: Are you better off than you were four years ago?
It’s an interesting question to ask today. Imagine it was May 2016 and I told you that four years from now pandemic deaths, small business failures, unemployment, inflation, and corporate earnings contraction would all be at or near record levels. Would you be surprised? Would it make sense to you that in light of all that misery, stock prices were at the highest levels in 18 years?
I would have been surprised — though some economic contraction after so many years of expansion would not have been a shock. And I would conclude that given that contraction, the high stock prices were not sustainable.
Here’s a quick run through of the numbers.
COVID-19 has caused incalculable misery — but for now it is far from the worst pandemic. Back in 1919, when the globe hosted 1.8 billion people, Spanish flu had claimed the lives of an estimated 50 million people – 2.8% of the world’s population.
As of the morning of May 13, 2020, 292,000 had died from COVID-19 up 314% from the 70,530 fatalities on April 6. Out of 7.8 billion people on the planet – today’s death toll represents 0.004% of the world population. I know it will get worse, but I do not know if it will become worse than the Spanish flu was.
Small Business Failures
Thanks to the COVID-19 pandemic over 100,000 small businesses will never reopen, according to the Washington Post. The researchers who came to this conclusion found that small business failures represent at least 2% of America’s 30 million small businesses and 3% of its restaurants — despite a $700 billion rescue plan from Congress.
The worst wave of small-business bankruptcies and closures since the Great Depression is on deck, according to the Post reports. During the Great Depression 1% — or 100 of every 10,000 businesses failed, according to UPI. And it’s hard to see how small businesses will be able to survive after being closed for weeks followed by reopening at half capacity to enforce some social distancing.
In 1933, at the depth of the Great Depression, unemployment peaked at about 25%. The April unemployment rate hit 14.7%, according to CNBC, although the figure did not capture all the jobless. And since the beginning of March, some 33.5 million people have filed for unemployment.
With all those millions of newly unemployed cut off from sources of new money, it is a particularly cruel irony that the expected plunge in demand resulting from social distancing policies is not causing prices to plunge.
To be sure, oil prices have come way down — the core consumer price index saw its biggest one-month drop in history for data going back to 1957, according to CNBC. However, in April 2020, food prices, the most vital of all for those trying to survive — saw the sharpest increase than has been seen in nearly fifty years, according to the Washington Post.
I am fortunate to be able to pay the whopping increase — for example, last week the price of lamb where we shop soared 43% to $20 a pound.
The overall increase was not at high. The Bureau of Labor statistics reported that U.S. consumers paid 4.3% more in April for meats, poultry, fish and eggs, 1.5% more for fruits and vegetables, and 2.9% more for cereals and bakery products — overall 2.6% more for groceries.
Corporate Earnings Contraction
Corporate earnings are plunging. As CNBC reported, first quarter earnings are on track to fall 13.6%, Q2 is expected to plunge 40.6% while Q3 and Q4 decline 23% and 11.4% respectively.
These are the worst earnings declines since the depths of the Great Recession. The second quarter forecast would mark the biggest decline since the first quarter of 2009, when earnings dropped 41.1%, according to FactSet.
Despite plunging profits, the stock market — which has risen 30% since the March 23 low — has “the richest valuation in 18 years even as profit outlook worsens,” according to CNBC, “a gaudy 20.4 times forward earnings.”
How to explain the high valuations? As I posted on May 9, there are some companies that are bucking the trend — enjoying better than expected growth — and they dominate the S&P 500. I am gritting my teeth and buying into an S&P 500 index fund every month.