InSight

Market InSights:

Second COVID-19 Stimulus Niceties and Notes

We have an agreement, which means we can begin to criticize it and plan for the investment and economic effects. The bill is a litany of half measures, no long term solutions, and likely sets up a couple of battles in the next congress. 

Congress punted on evictions, postponing medical payments until early next year, and there is still an ongoing debate regarding the amount it is issuing in direct payments. The looming liability concern for businesses is still being discussed.

Here is what got done: 

Individual payments for many

Easily the most asked about part of the legislation is the direct payment to individuals that begin going out today. The passed version included $600 going to individual adults with an adjusted gross income of up to $75,000 a year based on 2019 earnings.

An increased amount will be going to those that file as heads of households who earn up to $112,500 and couples (or someone whose spouse died in 2020) who make up to $150,000 a year would get twice that amount.

This continuing political battle to raise this number from $600 to $2000 is still going on today, passing with all democrat and some republican support in the house. The senate is questionable as a few Republicans have endorsed the idea, including the two high profile candidates in Georgia – Loeffler, and Purdue.

McConnell has blocked the bill as of 10:20 am as I am writing this article. 

Unemployment benefits

With almost 7% of Americans still unemployed and millions more under-employed, Congress acted to extend multiple programs to help those out of work, albeit at less generous levels than in the spring. Too much of the surprise of those tracking the issue, the final bill doesn’t include the expanded coffers many anticipated and is considered a skinny agreement. 

The agreement would include:

  • 11 weeks, providing a lifeline for hard-hit workers until March 14. 
  • Up to $300 per week (half the amount provided by the original stimulus bill in the spring)
  • Pandemic Unemployment Assistance — a program aimed at a broad set of freelancers and independent contractors — for the same period, providing an additional $100 per week

Better late than never, the expanded agreement is a second band-aid for those Americans that continue to seek employment as employers have halted hiring. The near term negative effect of unemployment cannot be understated. But as we look out to the intermediate (6 months) range seems to hold a fantastic capacity for consumers to unwind pent up spending in short order. The unemployment insurance isn’t expected to be much but will support many Americans who put more and more spending on credit cards in the second half of the year. 

Funds for Child Care, Schools, and Colleges

School budgets have been uniquely impacted by the pandemic and have left their outlook for the year to some impaired:

  • $82 billion for education and education service providers, 
  • That figure includes $54 billion for stabilizing K-12 schools
  • It also includes $23 billion for colleges and universities
  • $10 billion for the child care industry

K-12 schools saw more support than the initial package in dollar terms, and even more than the proposed package in November; however, the funds still fall short of what both sectors say they need to blunt the effect of the pandemic and to support operations in 2021. 

The majority of school districts transitioned to remote learning and as a result, we were asked to make expensive adjustments to accommodate while seeing enrollment drops upend budgets. Colleges and universities are also facing financial constraints amid rising expenses and falling revenue.

Child care centers that are struggling with reduced enrollment or closures will get help to stay open and continue paying their staff. The funds are also supposed to help families struggling with tuition payments for early childhood education. 

Funding for broadband infrastructure

The stress on national broadband has been higher than ever, remote work and education on top of the expanded requirements of technologies like Zoom, have put a major strain on national networks. The legislation includes $7 billion for expanding access to high-speed internet connections. Much of this spending was anticipated in an infrastructure bill, that has been brought forward as a result of the pandemic. Two major points in this part:

  • Half this stimulus is earmarked to cover the cost of monthly internet bills by providing up to $50 per month to low-income families.
  • $300 million for building out infrastructure in underserved rural areas and $1 billion in grants for tribal broadband programs. (Part of another infrastructure bills spending prior to the pandemic) 

Extension of aid for small businesses (PPP)

The bill puts forward $285 billion for additional loans to small businesses under the Paycheck Protection Program. This renews the program created under the initial stimulus legislation and is largely an extension of dollars that were repurposed.

Funding for vaccines and eldercare facilities

The source of concern early in the pandemic and the ongoing requirements to overhaul the elderly care facilities are addressed by this legislation as it sets aside nearly $70 billion for a range of public health measures targeted at elderly care facilities and the distribution of the vaccine. This breakdown includes: 

  • $20 billion for the purchase of vaccines 
  • $8 billion for vaccine distribution 
  • $20 billion to help states continue their test-and-trace program
  • Earmarked funds to cover emergency loans aimed at helping hard-hit eldercare centers.

A ban on surprise medical bills

The Bill supports efforts to help Americans avoid unexpected medical bills that can result from visits to hospitals. The legislation also makes it illegal for hospitals to charge patients for services like emergency treatment by out-of-network doctors or transport in air ambulances, which patients often have no say about. This measure has had some long time support from Democrats and was criticized for not including some provision in the Affordable Care Act. 

Rental protections

One more month of halting evictions is pushed out to the end of January. The Department of Housing and Urban Development separately issued a similar moratorium on Monday that protects homeowners against foreclosures on mortgages backed by the Federal Home Administration. It runs until Feb. 28. This has had several enforcement issues and while the legislation is a fantastic lipservice, the issues of evictions for individuals with a history of rental disqualification from before the pandemic are a continued source of evictions.

The bill DOES NOT include liability protection for business

A criticism by many that Democrats largely held out a provision for liability protection for companies trying to reopen. This element, opposed by labor unions and supported by the national Chamber of Commerce was a sticking point that went without inclusion. The discussion was important because it would allow businesses to follow their local recommendations to reopen to have legal insolation from lawsuits later on. This will continue to be a discussion in congress as a “reopen” is structured and the liabilities for business owners regarding COVID exposures are defined. 

Conclusion:

This gets us through the winter and hopefully the hump of COVID as the vaccine gets rolled out. It still leaves too much for the 2021 congress to cover and cover quickly. What the continued political, monetary, and fiscal landscape reactions look like is still up for debate. The curvature of risk in equities peaks in February (as I write this) so markets are pricing in a 2 month include equities and a political battle come early spring.

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Euro-Trap: The Trap of Low Valuations Amid Declining Fundamentals

In recent months, investors seeking diversification have been drawn to European equities, attracted by their seemingly inexpensive valuations, low price-to-earnings (P/E) and price-to-book (P/B) ratios compared to the overheated valuations of U.S. markets.  On the surface, these metrics offer a compelling narrative: European stocks are significantly cheaper than their U.S. counterparts, promising potential for higher returns as markets normalize. Yet, these valuations are not necessarily indicative of opportunity but rather a reflection of deeper, systemic issues plaguing the region’s economy. Europe’s industrial heart, once a powerhouse of global manufacturing and innovation, now struggles under the weight of low GDP growth, rising unemployment, and declining corporate earnings. Economic expansion in the eurozone has slowed to a crawl, with Vanguard’s projections for 2025 GDP growth at a mere 0.5%, underscoring the region’s persistent inability to rebound from the energy crisis and other structural inefficiencies. Rising unemployment—forecasted to hit 6.9%—exacerbates these woes, signaling broader challenges in labor market adaptability and productivity. These economic struggles are compounded by structural risks, including the looming specter of tariffs that threaten to undermine Europe’s export-driven economy. Trade tensions with the United States have escalated, and any new tariff measures on key sectors like automotive manufacturing could deliver a significant blow to economic activity in major industrial hubs such as Germany and France. Additionally, declining earnings across sectors signal that the region’s companies are struggling to navigate an environment marked by persistent inflationary pressures, weakening external demand, and high levels of debt. For many firms, the low valuations investors find appealing are symptomatic of these fundamental weaknesses rather than hidden potential. Taken together, these factors suggest that European equities may be a trap for unwary investors, lured by attractive metrics but unaware of the precarious foundation underpinning the region’s markets. Understanding these dynamics is essential for making informed investment decisions in a landscape fraught with risks. The Economic Landscape: Subdued Growth and Rising Unemployment The euro area’s economic outlook is fraught with difficulties. Vanguard’s recent economic report projects GDP growth of a mere 0.5% year-over-year for 2025, far below the region’s long-term trend. This sluggish growth stems from persistent weaknesses in the manufacturing sector, ongoing repercussions from the energy crisis, and weakening external demand. Germany, often considered the industrial engine of Europe, exemplifies these struggles. Industrial production has been declining steadily, as supply chain disruptions and softening global demand weigh heavily on output. Meanwhile, the broader region’s unemployment rate is forecasted to rise to 6.9% by year-end 2025, driven by slowing economic activity and structural inefficiencies. This figure reflects not just cyclical challenges but also deeper issues, such as a failure to implement productivity-enhancing reforms and adapt to technological advancements. Inflation Erodes Earnings and Competitiveness While headline inflation in the euro area has declined from its October 2022 peak of 10.6%, core inflation remains sticky. Both headline and core inflation are projected to fall below 2% only by the end of 2025. However, inflationary pressures have already eroded corporate earnings across the region, particularly in energy-intensive industries and consumer sectors. Companies have struggled to pass on rising costs to consumers, leading to margin compression and weakening bottom-line performance. Adding to the economic malaise is the looming threat of a dovish monetary policy pivot by the European Central Bank (ECB). While the ECB is expected to reduce its policy rate to 1.75% by the end of 2025, this move could signal a lack of confidence in the region’s recovery prospects, further unsettling markets. Valuation Metrics: A Double-Edged Sword European equities are undeniably cheaper than their U.S. counterparts, with the Stoxx Europe 600 Index trading at a 47% discount on a P/E basis and a 61% discount on a P/B basis. However, these metrics may not indicate value but rather reflect the market’s justified concerns about the region’s future earnings potential. Historical data shows that low valuations often coincide with declining revenues and profits. For instance, European companies with net debt exceeding 50% of market capitalization have consistently underperformed, and many sectors—including telecommunications and traditional manufacturing—are burdened by structural inefficiencies and high leverage. Currency Risk: The Hidden Drag on Returns For American investors, currency risk adds another layer of complexity to investing in European equities. The euro has been weakening against the U.S. dollar due to divergent economic growth trajectories and monetary policy stances between the two regions. While the Federal Reserve has maintained a relatively hawkish stance, the European Central Bank’s dovish pivot has placed downward pressure on the euro. This currency depreciation means that even if European equities deliver modest gains in local currency terms, those returns can be significantly eroded when converted back to dollars. For instance, a 5% gain in euro-denominated equities could be entirely offset by a 5% decline in the euro-to-dollar exchange rate, leaving U.S.-based investors with flat or negative returns. Moreover, a weaker euro increases the cost of importing goods and services, exacerbating inflationary pressures within the eurozone and further weighing on corporate margins. This creates a feedback loop that dampens both the economic outlook and investment returns, particularly for foreign investors who must navigate these currency fluctuations. The Impact of Tariffs and Trade Tensions Compounding Europe’s woes is the specter of new tariffs, which threaten to disproportionately impact the region. Trade tensions between the U.S. and Europe have escalated, with potential tariffs on European automotive exports and other industrial goods looming large. These measures could further dampen Europe’s export-driven economy, exacerbating the challenges faced by key sectors. The automotive industry, which accounts for a significant portion of Europe’s GDP and employment, is particularly vulnerable. With major automakers reliant on exports to the U.S. and other global markets, tariffs could trigger job losses and deepen the economic slowdown in manufacturing hubs like Germany and France. The Spillover Effect of U.S. Market Corrections Investors hoping to escape the turbulence of U.S. markets by pivoting to Europe may find little refuge. Historically, major drawdowns in U.S. equities have dragged European markets down with them. American investors, who now own an estimated 30% of European

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The Bifercated Landscape of the “Technology” Group: Exciting Investment Trends to Follow

In the realm of technology investments, we can observe a distinct bifurcation between two categories: stable cash-flowing investments and risky, cash-burning companies. This differentiation arises from the varying nature of these investments and their roles in the technology landscape. On the one hand, we have large, stable cash-flowing investments in technology. These are typically established companies that provide essential products, services, or infrastructure to support the operations of enterprises across various industries. These companies have a proven track record, generate consistent revenue streams, and often have a strong market presence. Examples of such investments include established software companies, cloud service providers, telecommunications companies, and hardware manufacturers. These investments are sought after for their stability, predictable cash flows, and potential for long-term growth. They are considered less risky and are often favored by conservative investors looking for reliable returns. On the other hand, we have risky, cash-burning companies that are the future of innovation and ideas. These are typically early-stage startups or emerging companies that are pushing the boundaries of technology and driving disruptive innovations. These companies are characterized by high research and development costs, aggressive market expansion strategies, and a focus on growth rather than profitability in the short term. Examples include companies in emerging fields like artificial intelligence, biotechnology, renewable energy, and e-commerce disruptors. While these companies may not generate substantial cash flows initially, they have the potential to revolutionize industries, capture significant market share, and provide exponential returns to investors who are willing to take on higher risk. The distinction between these two categories of technology investments reflects the different investment strategies and risk appetites of investors. Stable cash-flowing investments provide a sense of security and are suitable for risk-averse investors seeking steady income and capital preservation. On the other hand, risky, cash-burning companies offer the allure of high growth and substantial returns, attracting more adventurous investors who are comfortable with the uncertainty and volatility associated with early-stage ventures. Both categories play an essential role in the technology investment landscape. Stable cash-flowing investments provide the backbone of the industry, supporting day-to-day operations and ensuring the smooth functioning of enterprises. They offer stability and reliability to investors. On the other hand, risky, cash-burning companies are the engines of innovation and drive technological progress. While the risks are higher, the potential rewards can be significant for those who identify and support the next big breakthrough. The technology investment landscape has been bifurcated into stable cash-flowing investments and risky, cash-burning companies. Each category serves a distinct purpose, with stable investments providing reliability and predictable returns, while risky investments fuel innovation and offer the potential for exponential growth. Successful investors navigate this bifurcation by diversifying their portfolios and balancing the need for stability with the appetite for risk. We are seeing a transformation in the way technology companies behave. In the past, rising interest rates were bad (and still are for debt-laden companies) but now that Technology has become a cornerstone to all enterprises, the solution for labor shortages, and addressing inflation the upper half of the group is no longer the interest rate exposure it once was. 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Internet of Things (IoT) Connectivity: The Internet of Things has already connected billions of devices worldwide, but its expansion is far from over. In the future, IoT will create a seamless network of interconnected devices, enabling smart homes, smart cities, and even smart industries. From smart appliances and wearables to intelligent transportation systems and environmental monitoring, IoT will enhance efficiency, reduce waste, and improve the quality of life for people around the globe. Augmented Reality (AR) and Virtual Reality (VR): Augmented Reality and Virtual Reality technologies have gained significant traction in recent years, offering immersive experiences across various fields. In the future, AR and VR will blur the lines between the physical and digital worlds, transforming industries such as entertainment, education, and healthcare. 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