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MARKET COMMENTARY

Bulls Wake to Second Wave Fears

June 12, 2020

Fears of a second wave of Covid-19 infections dented weeks of rising investor enthusiasm for the U.S. economic reopening. The Dow plunged 1,800+ points Thursday on reports that more than one-third of states including Texas, Florida, and Arizona reported a notable rise in cases. Renewed concerns over Covid-19 overshadowed a continued decline in jobless claims to 1.50 million, down 355,000 from the previous week as more businesses called up workers. Continuing claims also saw a notable decline, falling 339,000 from the prior week to 20.9 million. Investors were also quick to dismiss the Federal Reserve’s announcement it would hold interest rates near zero through at least 2022, while pledging to provide additional support to the economy. Friday’s trading session brought some relief from Thursday’s sell-off as dip buyers waded into the market, but it only served to blunt the week’s losses to -5.55%.

Federal Reserve Fails to Lift Markets

Fed Chairman Powell struck a sobering tone on the economy during his comments following the FOMC’s two-day meeting that concluded on Wednesday. Powell announced that rates would remain unchanged with the majority of FOMC members believing that a rate increase won’t be seen until 2023. The duration in maintaining rates near zero matched Powell’s characterization that the economy still has a “long road to recovery” ahead which is in sharp contrast to the market’s own perspective of late. Along with his comments, the Fed released its projections for jobs and economic growth this year. The central bank is forecasting the unemployment rate to end the year between 9% and 10% and for it to be 6.50% in 2021. While these estimates are lower than the 13.3% rate seen in May, it is a far cry from the 3.50% levels seen prior to the shutdown. Powell also threw cold water on May’s stellar jobs report, highlighting the potential long-run damage the virus could inflict on the economy by changing consumer and business behavior. Considering the sluggish jobs market, the Fed expects the economy will contract anywhere between -4% and -10% (-6.5% average estimate) this year. The silver lining is that the Fed does expect economic growth to rebound strongly next year to approximately 5%, but it will take until 2022 until the losses are fully recovered.

Prices Fall Flat

Economic reports were extremely light this week with consumer and producer prices being the highlights of the week. Consumer prices were relatively flat in May, down -0.10% for the month. Year-over-year (YOY), however, prices were relatively flat as well, up +0.10%. That was the smallest YOY increase since September 2015 and followed a 0.30% increase in April. May’s report marks the third consecutive month of weak prices as demand remains sluggish. Core prices, which exclude the volatile food and energy sectors slipped -0.10% in May, but that was an improvement from April’s -0.40% decline. Core prices were up +1.20% YOY, their smallest gain since March 2011. Meanwhile, businesses saw prices rebound as producer prices rose +0.10% in May, reversing April’s -1.30% decline. Rising meat prices primarily drove the increase. Prices were up +0.80% YOY in May which also reversed April’s -1.20% decline. Excluding volatile food, energy, and trade services, core producer prices were relatively flat at 0.10% in May. Core producer prices were down -0.40% YOY for their largest year-on-year decline since the introduction of the series in August 2013. What is interesting about this is that after years of producers absorbing price increases in order to insulate consumers and support sales volumes, producers are choosing to capture the recent cost decreases in order to expand margins in response to decreased sales volumes. Normally, lowering prices would unlock more sales, but given the lockdown and social distancing, doing so presently wouldn’t have a material impact on sales volumes and therefore producers are better off improving their margins. This runs contrary to standard economic theory, but it highlights the unique conditions and economic trade-offs the pandemic has created.

Reality started to set in for markets this week following a month of optimism over the pace and success of the reopening. Thursday’s move was a reminder that while downside risk has been reduced, it has not been eliminated and the economy still has a lot to do to live up to recent valuations. Several weeks ago, we spoke about the enormous amount of cash parked in the financial system – whether that be direct stimulus checks, PPP loans or simply investors sitting on the sideline. That potential energy, combined with the Fed’s unlimited support pledge, bid up equity markets. The market’s thesis has presumed that as long as things get back to normal by mid to late summer, then there would be plenty of capital in the system to get us through. This week’s infections data was the first statistical setback to that glidepath, triggering a selloff and helping flush out some of the speculation that has been building for weeks. It is our opinion that, despite this week’s dip, the broader market is still ahead of where it should be given the present uncertainty. Even if a full-fledged, second wave does not materialize, several tests still lie ahead for investor sentiment between now and the fall, whether that be the virus itself, the likelihood that capacity remains stubbornly underutilized, or annoyance with the shrill emanating from the campaign trail. A few days of selling hasn’t been enough to move us into the conviction buy camp, rather, a selloff of this nature has been long overdue.

The Week Ahead

We’ll see if consumer spending bounced back as states began reopening their economies in May with the release of retail sales results. Traders will also dive deep into factory and construction data with reports on industrial production and housing starts.

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Looking Forward

As advisors, we strive to offer our clients a measure of stability in turbulent times. We have been virtually meeting with our clients, and we welcome the opportunity to check in and see how everyone is doing and feeling in today’s environment. Below are some of the planning and investing topics that have been top of mind for investors and the conversations we have been having over recent weeks and months. To the degree these concerns may be on your mind as well, please do not hesitate to call us.

1) Maintaining investment strategy.

The pandemic has provided an opportunity for real-world stress testing of risk tolerance. Our advisors have been helping clients balance a variety of emotional responses and immediate needs with remaining on track for future financial goals. In our experience, advice from a trusted advisor can help investors weather the declines that happen in the short run and make complicated yet rational decisions to optimize financial outcomes. We are encouraging clients to look optimistically to the market recovery and to continue thinking longer term. This advice is consistent with our history and with our “cooler heads prevail” approach.

2) Lifestyle adjustments due to decreased compensation.

We understand that some investors are worried more about their livelihoods, businesses, and employees than they may be about their portfolios. Individuals have experienced a wide range of impacts from this pandemic. We have been helping clients update their financial planning models and spending plans where needed to see how they can still accomplish their goals.

3) Investment portfolio entry point.

Depending on an investor’s time horizon and financial situation, the downturn may be a buying opportunity. We have been advising investors on strategies for putting cash to work through market volatility. No one wants to be the investor who bought at the absolute peak, and our portfolio managers are minimizing risk by utilizing a number of trading strategies, including dollar cost averaging, which is dividing up the total amount to be invested across periodic purchases to reduce the impact of volatility on a portfolio.

4) Retirement plan adjustments.

For those nearing retirement, the recent market downturns can put a damper on years of otherwise diligent saving and planning. We’ve been helping clients evaluate whether to work a little bit longer and delay retirement until portfolios rebound, thus providing the relative security of continuing to draw a paycheck while allowing your nest egg to recover. This strategy can also help those with defined benefit plans until they gain more clarity on the security of company pensions with many corporations announcing bankruptcy proceedings.

5) Capital appreciation vs. income generation.

At the end of the day, everyone wants total return in their portfolios, but there is something to be said for tangible returns in the form of dividends and income. The security of that can oftentimes help people emotionally weather these storms and feel more confident than the alternative of capital appreciation. Our advisors can discuss your unique situation and help you make the right financial decisions.

We believe that an experienced and trusted advisor can offer valuable guidance and a calming perspective — especially during uncertain times. Our team is here to help you navigate the repercussions of recent economic news and events. Additionally, if you have any friends or family members who might benefit from our advice, we would love to be of service to them as well and can be reached at (214) 891-8131.

 

 
 
 
 
 
 

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