Trump’s Relief Plan & Howard Mark’s Market View

This weekend, Trump signed an executive order extending the CARES Act. This has a lot of consequences including further deferring student loan payments and extending restrictions on housing evictions. However, in an effort to not disincentivize the work force, Trumps plan slashed the pandemic unemployment checks from $600 to $400. $300 of this will come from the federal government while states are expected to contribute $100. Those who live in states who refuse the plan or simply cannot afford it will only receive $300 in relief.

We have talked a number of times about how the Fed is propping up the economy, specifically the stock market with artificially low rates. The billionaire investor, Howard Marks, explains what this means and how sustainable it is in one of his famous market memos. Marks explains the relationship between the Fed cutting rates and increased stock valuation. (Because people move their money from debt markets to equity for a larger return) The S&P typically trades at a P/E (price / earnings) ratio of around 16x.  With current rates, Marks claims the S&P should be trading at 24x. Many hear this and say there is no chance this is sustainable with everything that is going on. However, the stock market is not an accurate depiction of the market in general and most people do not know the S&P is a market cap weighted index. (Meaning more valuable companies hold more weight and can shift the market easier) FAAMG stocks currently make up between 15-20% of the S&P. Marks points out that FAAMG stocks are up 36% on average this year while the median S&P stock is down 11%. However, FAAMG stocks are the tech companies who have and will continue to benefit as we see more and more of a digital shift. Mark’s is not sure if he is a bull or bear yet but reinforces the complexity of our current market.

CNBC released small business confidence numbers that show signs of improvement but “is not the V-shaped recovery we were hoping for”. Confidence scores are up 8% from last quarter but are still down over 13% from the start of the year.

Mortgage Backed Securities are slightly up from where they closed on Friday but are still flirting with the ceiling of resistance that we have referenced for weeks. We hold a locking bias.