September 18, 2020
Stocks struggled for a third consecutive week as investors continued to unload growth and tech shares. News during Friday’s trading session that the U.S. government would block all TikTok and WeChat downloads put additional pressure on already muted sentiment. In contrast, value stocks have recently benefited on a relative basis from the rotation out of momentum and into the more economically sensitive names. They were boosted once again on Wednesday by the Federal Reserve’s announcement that it intends to keep interest rates at 0% through at least 2023. The announcement comes in response to softening data in recent weeks that has evoked a longer-term accommodative stance by the Fed in order to keep the economy from backsliding. Separately, August’s retail sales figures were released this week. While the report showed some weakening relative to previous readings, consumers still managed to increase their spending for the fourth consecutive month. Overall, the market was uninspired this week, resulting in the S&P 500 falling -0.64%.
Zero Rates for Years to Come
The Federal Reserve made its future plans explicitly known following this week’s FOMC meeting, announcing it intends to keep interest rates low through at least 2023. The move was intended to send a strong signal to markets and let investors know that it intends to provide the necessary monetary support so long as the coronavirus-induced hangover remains. The central bank now projects the U.S. economy will contract -3.70% for the year (2020). This is actually quite an improvement relative to its -6.50% GDP forecast in June. While the major components of the recovery – including the monetary, fiscal, and private industries’ response – have all worked admirably to avoid worst case scenarios, considerable damage was sustained that will take additional time to heal. Unemployment is expected to remain elevated through the year with the Fed forecasting that the unemployment rate will still be as high as 7.60% by year-end. Here again, this is an improvement relative to the 8.40% unemployment rate reported in August but nearly double the unemployment rate heading into the crisis.
Back-to-School Spending and Remote Workers Lift Retail Spending
Retail sales notched their fourth consecutive monthly gain with sales rising 0.60% in August. Although that is down from the 0.90% increase in July, it is still encouraging and comes despite the loss of enhanced unemployment benefits and elevated unemployment. Back to school spending boosted retail spending during the month as parents outfitted their children with new clothes and electronics. Remote workers also lifted sales, settling in for the long haul by continuing to buy up furniture to convert their homes into more work-friendly spaces. Grocery stores actually saw their sales fall -1.60% during the month, an indication that more and more people are leaving their homes and the coronavirus induced scarcity has passed. Even online merchants such as Amazon saw sales slow. Overall, August’s retail sales figures were encouraging by signaling consumers are still capable of spending even as government stimulus has waned.
While market sentiment this week may not have been very enthusiastic, quietly the dominant factor was the Fed’s announcement. Their announcement to keep rates low, coupled with the Fed’s previous statement that they are willing to let inflation rise without an immediate response, means that rates are unequivocally anchored to zero for the foreseeable future given the most plausible paths for the economy looking forward. It is a double-edged sword. On the one hand, low rates are good for economic and investment activity, providing investors with a degree of downside protection, but it also inflates and distorts asset valuations, requiring that investors reach and speculate for return. The market currently trades at a 21x PE. In normal times, this would be expensive but in a low interest rate/low inflation environment its entirely justifiable. For investors, this sets up a problem based on your investment horizon. Investment returns are negatively correlated with the P/E multiple at which you invest. If long term P/E’s tend to average closer to 16-18x, the fact that the market is trading at a 21x presently means that the future contains a headwind for investment returns. This headwind can be overcome so long as the future growth on earning exceeds the dampening effect of those earnings being valued at a lower multiple. This is the reason why growth stocks carry a high multiple, but when we’re talking about a market as a whole – the U.S. market in particular that has a sustainable growth rate of 2-3% – the consequence is that investors may just have to accept lower future returns. The conundrum for investors today is that the Fed and the market has inflated asset valuations to a justifiable level based on current monetary policy, but to a level that is high historically. Should rates ultimately normalize, so too should multiples. This, in turn, should place a headwind against future returns. This all makes the Fed’s announcement this week bittersweet – its undoubtedly good for investors in the near term with a price to be collected later.
The Week Ahead
Real estate has been one of the hottest sectors of the economy during the pandemic. We’ll see if the momentum can continue with the release of new and existing home sales. Also up next week are durable goods orders which have been boosted by strong consumer demand for cars and trucks as commuters avoid public transportation. Overseas, we’ll check in on the Eurozone which releases its latest figures on manufacturing and services.
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Estate Planning Documents for Young Adults
As colleges have brought back students to campus to begin the fall semester, we’ve been reading a lot in the news lately about FERPA, a federal law protecting student privacy, and HIPAA, a federal health privacy rule. The FERPA law was designed to protect the privacy of academic records, including campus health clinic records, which belong strictly to the student. There is an exception to FERPA when a college feels that there is a need to protect the health or safety of a student, or of others, information may be shared with an appropriate party. Typically, public health officials and parents are the types of appropriate parties to whom schools may but are not required to disclose information under this FERPA emergency exception. This rule is coming into play as schools nationwide grapple with balancing student privacy while keeping faculty, students, and the community informed about COVID cases on campus.
The Family Educational Rights and Privacy Act (FERPA) requires the student provide prior written consent before their information may be disclosed. It applies to all colleges and universities that receive funding from the federal government. FERPA also encompasses financial information, so even if a parent or guardian may be paying for a student’s education, your child’s financial information, including tuition costs, tuition status, financial aid, and more, may not be disclosed to you without their consent. Having important consent forms in place, such as FERPA in addition to the forms outlined below, can be helpful for families, not just during the current pandemic but to be prepared for any emergency or other situation that may arise.
A HIPAA (Health Insurance Portability and Accountability Act) consent will allow a patient such as your college student or other adult child designate family members who can be updated about their medical information during treatment, such as diagnoses, medications, and test results. It is a stand-alone, free form that does not need to be notarized. Patients routinely complete these forms when establishing care at a doctor’s office. Students may specify which parts of their health records remain private. Without this form, a parent may not be able to receive any medical information if a child is in an accident or becomes ill even if your child is on your health insurance and you are footing the bill.
A healthcare or medical power of attorney (POA) is a legal document naming someone as a “medical agent” for your college student or young adult child. If your child becomes incapacitated, you can make informed medical decisions on their behalf. This document can name a parent as the point of contact and decision-maker and allow the designated POA to decide the best course of action with the doctors. A medical power of attorney form is strictly for health care choices, so your family should also discuss having a durable power of attorney for financial decisions.
Once a child turns 18, their finances also become private. A durable power of attorney allows a college student to give authority to another person to make financial and legal transactions on the student’s behalf, such as managing bank accounts, paying bills, filing taxes, and breaking a lease. This could be helpful if your college student spends a semester abroad or takes a gap year.
Families should have an open dialog about privacy and what scenarios the documents outlined above would be used. If you have any questions about any of these forms, please reach out to your advisor.