It hasn't hit us yet. The pandemic has not, as a nation, been nearly as upended as we thought it would have when we saw the depths of the horror in April. Most companies did not foresee that May would be better and that June turned out to be a pretty good month.
I kept thinking we would see some breakdown, some meaningful claims for forbearance when we got through earnings for the financials but it just didn't happen. The banks took charges but they seemed in excess of what's been going wrong. Some made little sense: how badly was Goldman Sachs (GS) really hurt on its rather smaller loan portfolio? Did it really need to take a $1.59 billion credit provision? I thought they were too conservative.
Then last Friday we got earnings from American Express (AXP) and they were solid numbers with the exception of corporate travel and entertainment. The big shocker? The strength in small business. Over and over on that totally upbeat call we heard about how people wanted to spend. It was almost as if the pandemic was over.
Except the damage is about to begin. After speaking to Minority Leader Kevin McCarthy last night I believe that it will be difficult to reach a compromise on an emergency package. His insistence on the $200 versus the $600 in weekly additional benefits is not the only a point of contention but it is what looms large because I believe that August is the month the pandemic really hits.
First, when the $600 additional benefits, meant to actually keep you at home rather than work and spread Covid, goes away, you will see a contraction in consumer spending much larger than bricks-and-mortar retail is ready for. A $1,200 check helps, but helps who? Robinhood traders? I would say Walmart (WMT) , Target (TGT) , Costco (COST) , Home Depot (HD) and, of course Amazon (AMZN) .
Second, rent. When Covid hit and people stopped paying rent, landlords were able to take the security deposit away and pay their own mortgage with it.
That was April and May's money. Banks offered forbearance on their mortgages if you applied for it. Very few did. I think with the extra $600 running out a lot of good mortgages turn bad and the requests will be made to forbear, That will cause huge problems for the banks, which is why they trade so poorly. I would be very careful of any REIT that has bricks-and-mortar tenants or renters.
Third, social distancing. Store owners and restaurateurs have now figured out that they can't make money with social distancing,. I think they went through their savings in July and will now have to close. You will see millions out of work who might have been benefiting from an owner's PPP. Vacationers are demanding social distance. Owners are afraid without it they will be sued. Social distancing is an anathema to small business but it is mandatory for health.
Finally, I think that this will be the beginning of when savings will at last be tapped. As it is, there has been a clamp down on spending by most Americans yet 70% of those on unemployment are making more than they did at their old job. If benefits get cut to $200 a week they will try to go back to their old job.
But it will most likely not be there.
August is when the rubber hits the road. The optimism over the curve flattening nationwide, the vaccines being rolled out, the desire to spend, to go anywhere and the non-existent fear of being evicted will all coalesce to crimp the economy.
It might not be a bad time to lighten up on the non-Cramer Covid stocks. It just could be a tipping point for a huge swath of companies that we thought were bouncing back.
Given the Washington jam-up, I now think they won't.