We are analyzing the Local Economic Impact Report that came out over the weekend from Yelp, a business review company with over 5 million businesses on its platform. The report showed that 41% of businesses have permanently closed due to the virus. Broken out by category, 53% of restaurants are now permanently closed, 35% of retail stores are now permanently closed, 24% of beauty and spas are permanently closed and 26% of fitness gyms. So, those are some big numbers that we’re looking at carefully because obviously this matters as the virus continues to spread, especially in the southern states. Will consumers slow the pace of their spending? If so, that could lead to further permanent closings.
The Fed & Debt
History is happening as The Federal Reserve is taking action that it has never taken before, dating all the way back to mid-March when they cut interest rates over a weekend. Starting last week, the Fed started buying company bonds individually, specifically corporate debt. Historically, the Fed has only bought treasury debt or mortgage debt. The Fed is expanding its balance sheet and expanding what it’s buying. It has purchased over 794 different individual corporate bonds. It’s really trying to create a broad base of buying. The program is estimated to include $250 billion in already issued debt and $500 billion in newly issued corporate debt. They are trying to keep companies that are going under liquid by keeping the debt markets open. So, if you have low or no revenue, but you still have expenses, you’ve got to go out to the market to borrow on those expenses. The bond market is where companies do that. So, the Fed buying bonds on corporations is providing the equity of those corporations that allow them to hopefully stay open. What is interesting about this and tricky is that the Fed has never done this. We don’t really have a history of what happens if one of these companies goes bankrupt. What happens when a corporation goes bankrupt, is that the bondholders then take ownership of the company’s assets. It’s definitely going to be very tricky and we are reaching un-chartered territories. So, hopefully, this is a good thing. It’s definitely showing signs of extremes in these financial markets.
If you go back and look at the end of May, you have to look at this data in your rear-view mirror, as it firms up a little bit. There are a lot of good things going on, particularly in terms of consumer spending. As we’ve discussed on the vlog many times before is that consumer spending is the core of 70% of what the market does. If you look at May, household goods spending was up 8.2%. This is a monthly record. Part of it is stimulus, but not all of it. If you look at durable goods spending, spending has gone up on big things like autos, refrigerators and things like that. Consumers have to be confident to be able to go out and spend like that and it’s a lot different than let’s say going out to buy milk and bread. That durable goods spending was up 28.6% in May, also a record. If you look at the manufacturing side we look at what’s going on with purchasing managers. That data is almost back to the point of being at expansion. Back at the end of March when Covid-19 hit, it really tailed off. However, for the last couple of months, it’s picking up and is just a hair away from being back at expansion territory. Lastly, the FDIC did a stress test last week on the 33 largest banks in the country. Despite running the scenarios due to COVID-19 really hitting the lending at high volume, banks were fine. We didn’t have that at the end of 2008. It took us a year or two to use the Tarp Program to rebuild that. What’s important about that to your money is that banks are going to continue to lend. They’re not going to lock up like they were in 2008 for a couple of years. If we can really get the lid off the pandemic, then the spending is out there.
Greg Powell, CIMA®
President and CEO
Email Greg Powell here
Bobby Norman, CFP®, AIF®
Email Bobby Norman here
Ashley Page, JD, MBA
Senior Vice President
Email Ashley Page here
Trey Booth, CFA®, AIF®
Senior Vice President
Email Trey Booth here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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