Optical illusions trick our brains into seeing things that may or may not be real. They occur because our brains are programmed to interpret and make sense of what we see. A fascinating component of an optical illusion is that two people can look at the same image but see different things. The picture below is a well-known example of an optical illusion, the face vs. vase illusion. (Our sincere hope is your pronunciation of face vs. vase rhymes.) Some people see two faces staring at each other while others see a vase. Most people can eventually see both.
Another famous optical illusion is the older vs. younger woman illusion. The difference between this illusion and the prior illusion is that most people find it difficult to see both interpretations of the picture. They instantly see an older woman or a younger woman and struggle with forcing their brains to also see the other. (It is suggested that if you see an older woman focus on her nose and if you see the younger woman focus on her chin to see the other image)
The most perplexing optical illusions these days seem to be economic data, and just like the older vs younger woman illusion, most economist’s brains lack the ability to see both sides of this image. We spend considerable time reading the economic viewpoints and opinions of others. In particular, we know it’s important to be open-minded to the thinking of market strategists whose opinions differ from our own. Even the perma-bears. Their brains may see something that our brains don’t. Here are a few examples; Gasoline Usage - We find it very encouraging (from an economic standpoint) that gasoline usage is quickly rebounding from the shocking declines of March and April. The U.S. had been consistently consuming about 9.5 million barrels of oil a day over the last several years. The seasonal fluctuations have also been remarkably consistent. At our pandemic lows on April 24th, we only consumed 5.3mbd. We have since rebounded to 8.5mbd.
We have previously expressed our observation that the new normal oftentimes becomes the old regular rather quickly. At the headline level, it seemed to us that gasoline usage was supporting our observation. Not so quickly. We’ve read several articles that argue gasoline usage as a bullish economic indicator is being overstated. They believe the reason that gasoline usage has increased so much is due to fears of using public transportation. People are driving instead. That’s a reasonable thought that might modestly add to gasoline usage, but we aren’t sold. We would counter with, where are they driving to? It appears most of us are driving to our jobs based on the ADP payroll data. Payroll data – June’s payroll data said the U.S. added 2.8 million jobs. May’s payroll data was revised from a loss of 2.7 million jobs to a gain of 3.1 million jobs. This is a shockingly strong rebound that well exceeded even the most optimistic employment forecasts.
Pessimistic economists are quick to point out that the unemployment rate is still at its highest level since the Great Depression. They are correct. If the unemployment rate doesn’t continue to drop rapidly it is very problematic for the economy. We need workers working for the economy to properly function.
We expect the unemployment rate will continue to drop quickly. August will be a fascinating month for employment data. Special one-time unemployment benefits are set to expire at the end of July. Several of our small business clients, in particular those in the construction and restaurant industries, have expressed their frustration with trying to hire employees. They can’t compete against the benefits the Federal Government is offering for unemployment. It will be interesting to see what happens when those benefits expire. We expect the unemployment rate will drop considerably. TSA Checkpoints – The GreenPort Team has been traveling and comparing notes throughout this pandemic. While we often caution against allowing anecdotal evidence to influence an investment process, we’ve nonetheless been fascinated with our recent travel experiences. Airports were a ghost town when we traveled in March and April. As we recently headed out for our summer vacations, we were stunned at the number of people in the airports. Other than facemasks, it’s getting hard to differentiate pre-pandemic airport travel with current airport travel. The TSA would agree.
After initially plummeting, TSA checkpoints have been steadily rising. American Airlines announced it will be adding 25,000 flights back onto its schedule in August. Once again it appears the new normal is starting to look a lot like the old regular, albeit with a face mask. The New Normal economists argue that air travel will never return to its former self. Business travel will become Zoom meetings and vacations will be within driving distance. (Another reason for the increase in gasoline usage?) There is validity in both schools of thought but we expect TSA checkpoints to continue their steady increase and eventually get back to their prior levels. We are not dismissing the very real fear of contracting Covid-19 while on a plane, but time has a way of lessening fear. Air travel overcame the fear of terror attacks, we expect it will overcome the fear of coronavirus too. Stock market performance - After reaching all-time highs on February 19th, the pandemic devastated global economies and stock markets. After bottoming out on March 23rd, global stock markets have had an impressive rebound. However, most of the rebound is attributable to the FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks. These technology-oriented companies have done extremely well in a locked-down world where internet shopping and social media became our only means of commerce. Many stock market sectors have performed poorly in 2020.
We often are asked the proverbial question about what is keeping us at night. While we sleep quite well, we understand the spirit of the question. There is an expression that the most dangerous words in investing are “it’s different this time”. The FAANG’s stock price appreciation is reminiscent of the tech bubble of 2000. Despite this pandemic, the NASDAQ index which is mostly technology stocks is at all-time highs. In fairness, these stocks are nowhere near where their tech bubble valuations were at. Unlike the tech bubble, FAANG stocks have tremendous earnings and earnings growth that may well justify these higher P/E's. Is this another tech bubble or just an optical illusion?
Some people see a tech bubble with a handful of technology stocks dominating market performance. The newest stock market acronym (FAANGM) which includes Microsoft, accounts for a record high 25% of the S&P 500’s market cap.
Others see a reasonably valued market when they look at FAANGM. They argue these stocks deserve a much higher P/E than mere mortal stocks. Since 2015 the forward revenues of the FAANGMs are up 115%. The rest of the S&P 500 forward revenues are only up 3%. FAANGM forward earnings are up 95% compared to a 2% drop for the rest of the S&P 500!
When we look at the FAANG’s we can clearly see both images of this optical illusion. We think FAANG's valuation is reasonable given their fundamentals while we also see possible investor overexuberance. Non-FAANG stocks have started to perform better as our lifestyles slowly return to more traditional behaviors. We are keeping a close eye on their revenues and earnings. A rebound will give us confidence that the stock market recovery is more than just a technology bubble. In reference to the dominance of technology stocks, one of our perma-bear friends recently wrote that he sees this economy as a one-trick pony. We see it as a one-trick Clydesdale. Optically yours, The GreenPort Team