The Service Sector Still Awaits Its Second Chance

by John Mauldin

Main Street needs customers. The Fed, for as much as it is trying to flood the markets with money, can’t create them.

And yet, the jet fuel has succeeded in pushing stock benchmarks and valuations back near their old highs. Clearly, and probably rightly, investors are willing to look past the second- and possibly even third-quarter earnings, which everyone acknowledges will be dismal.

But what happens when earnings are dismal in the fourth quarter?

With the Fed in the mix, I suppose new market highs are possible this year or next, but I can’t imagine it lasting long. The animal spirits that drove well-known names higher are seriously weaker than they were in February, and I don’t foresee them coming back.

Here’s what I do see.

  1. Some businesses, small and large, will do extremely well in this environment. Their earnings will rise and help pull the indexes up. Likewise, we are going to lose more businesses than most currently think. They will have the opposite effect. This is going to be a stock-picker’s market. Index investors, as I have been saying for several years, will get their heads and their 401(k)s handed to them.
  1. The market is looking past the next two quarters. But are investors going to look past the fourth quarter? Even if we get a vaccine by year-end, it will be a miracle if we all get it by the end of 2021’s first quarter. And balance sheets have been destroyed for so many businesses. There will be opportunities for startups everywhere, as seasoned management will need capital.

It is entirely possible that investors simply become disillusioned with looking past the next few quarters’ earnings. At some point, the attitude will change to, “Show me the money!” Then again, who knows what the Fed will do. If the market starts turning down will they start buying stock ETFs like Japan is? Dear gods, I hope not. But right now, there is simply no way to predict what they will do.

  1. I will bet that over 100 companies currently in the S&P 500 will not be there 12 to 15 months from now. The big indexes are composed of the biggest companies. Which means that we are looking at not only a whole new economy, but perhaps an entirely new market landscape.

Just a reminder: Bull markets like this one don’t just retreat to reasonable valuations. They usually overshoot to the downside, just as they did on the upside. The lower bound is probably lower than many “worst-case” scenarios suggest.

That will not be good for Baby Boomers’ retirement plans.

This experience is going to leave deep scars on the economy, and on consumer/investor/business sentiment. This is going to scar a generation just as deeply as the Great Depression scarred our parents and grandparents.

Things we once took for granted—a leisurely restaurant meal, catching a movie, sharing a concert or a ballgame with other fans—are gone now and will come back in a different form.

But they will come back. We’re moving from one world to the next—an Age of Transformation—whether we want to or not.

We are all going to need that roadmap, and I want you on the journey with me. At my first-ever live virtual Strategic Investment Conference this month, we’ll focus on what the economy will look like over the next six months and in a post-vaccine world. You’ll hear from thought leaders who can show you what’s important, where the opportunities are and what to avoid. Learn more here.

 

 

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