Evaluating Activity in China
Numbers out of China are of particular interest, because they provide some idea of what the rest of the world might expect as it moves through peak quarantine and social distancing measures, starts to experience falling infection numbers, and looks to find a way back to normal.
One global specialty chain – a retailer that does about $22 billion in business annually in normal times – saw its global revenues drop nearly 50% in March. Its sales in China decreased over 80% in February. In response, it has cut salaries, laid off workers, cut its dividend, and decreased its full-year capital expenditures by 40%. This earnings season will be rife with similar stories from other large US businesses, to say nothing of the pandemic’s devastating impact on small businesses nationwide.
The Slog of Recovery
While this particular retailer’s headlines are full of bad news, the devil is in the details. It took six weeks into the virus outbreak before its business in China felt maximum negative effects – 64% of stores closed with sales dropping to almost zero. Two months after the peak – and one month after reopening 75% of its total stores – sales are still down 25%. Put another way, 14 weeks after the outbreak began in China, average sales are still down by a quarter.
Now, let’s use this retailer as a rough proxy for the US. If you mark the start of the US outbreak at March 1 and move out 3 months (approximately 14 weeks), you land on June 1. Don’t forget, according to the China proxy, this assumes the US economy is largely back up and running by June 1. Supposing current quarantine measures allow for caseloads to come down enough for economic activity to restart, does the federal monetary and fiscal response help buffer a lingering average sales deficit of as much as 25%? Not likely.
How Much Will Federal Aid Money Help?
The US is a $22 trillion economy. Consumption represents about $15 trillion of that total. If you clip 25% of that, you get $3.75 trillion. If reports from Washington are accurate, legislators are looking to add another $1.5 trillion to the $2.2 trillion in aid money that has already been unleashed by the CARES Act (Coronavirus Aid, Relief, and Economic Security Act). That would make for $3.70 trillion in total federal aid. This is close enough to the $3.75 trillion that may be needed to get consumer spending back to flat – not to growth. What’s more, it assumes that every single penny of aid money is spent – highly doubtful.
This analysis is back-of-the-envelope – maybe even sophomoric – but the point is clear. The federal aid dollars distributed in response to the COVID-19 pandemic may help get the US economy back to flat, but that’s only if we are lucky and follow an overall case trajectory comparable to China.
A well-known coffee chain reported in early April that their same-store sales in China were still down 42% during the last week of March. A UK grocery chain saw an uptick in sales and online ordering during the early weeks of the outbreak, but continues to operate on a base case assumption that the UK lockdown remains in place 12 weeks from the end of March, with moderate restrictions stretching to 16 weeks, and light restrictions lasting through 20 weeks.
The lesson for investors coming from China seems to be – don’t confuse going back to work with economic growth. Online sales are unlikely to account for a lack of confidence on the part of the US consumer about going out in public and interacting with the masses. As of April 11, S&P 500® top line revenue estimates for 2Q were expected to be off by 3.5%, with 4Q up 1.4% from last year. Based on the anecdotal evidence discussed here, that seems optimistic at best. Investors should remember that while earnings per share figures can be finessed by financial engineering, companies can’t fake top line numbers. While we are all hoping for an end to the public health crisis and a return to normal business activity, figuring out how US consumer activity rebounds from unprecedented circumstances is no easy task – but it’s an important one.
This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed are as of April 11, 2020, and may change based on market and other conditions.
Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.