2020 Q3 Investment Update – To Open or Not to Open? That is the Question.

Every individual and local government is asking themselves this same question. It is a constant struggle and well known that the virus has impacted everyone to varying degrees. How do you balance the economic and financial impact of the “Stay at Home” order, while also safely open the economy to get people back to work and keep food on the table? As Fed Chair Powell noted, “the coronavirus has taken a human and economic toll, and the burden has fallen most heavily on those least able to bear it.”

The recession began in February and may have ended in April or May. That would be the shortest downturn on record. That doesn’t mean the economy has recovered; it simply means that the economy began growing again. We saw a swift recovery in the stock markets as well since the S&P 500 bottomed on March 23. The market is +44% from the bottom (through July 15) and was +25.5% in the second quarter. In our last investment update, we felt optimistic that the market might recover faster than most thought. To most everyone’s surprise, the market is almost flat for the year (down about 1%) as we crossed the mid-way point…after it lost approximately 34% in 4 weeks (aka the fast 30%+ drop in market history).

Fueling the market rally has been enormous fiscal and monetary stimulus, as policymakers attempt to support the economy with the various tools in their toolbox. One tool used was the FED’s decision to cut interest rates to a target range of 0% – 0.25%. This has fueled economic growth because money is cheaper; houses are selling because they are still ‘affordable’ with mortgage rates at some of the lowest levels on record. The fiscal support was as unprecedented as the downturn itself, and more will likely be needed. The first three phases amounted to nearly $3 trillion, over 14% of gross domestic product (GDP). This money is currently making its way into the system, fueling corporate profits, providing jobs, and allowing consumers to start spending again and even take up day trading (since there are no sports to bet on J). When you consider it, what is the alternative to taking risk in the stock market? Cash is paying nearly zero. Do you want to sign up for a 30-Year Treasury Bond paying below 2% (currently 1.33%¹) for the first time in history? No, thank you. Our Investment Committee terms this a “melt-up,” where asset prices continue to rise. There is so much money being pumped into the system that it’s hard for asset prices not to rise, especially as investor sentiment has continued to improve as the market trends higher. Remember, “Don’t fight the Fed.”

Big Tech has led the bounce-back and continues to outperform year-to-date. Most notably, the so-called FAMAGs (Facebook, Amazon, Microsoft, Apple, and Alphabet (Google’s parent company) have led the recovery. The crisis has amplified demand for technology, which helps us communicate, educate, shop, and keep us entertained. Sean Markowicz, Research and Analytics Strategist from Hartford Funds said, “In terms of market weight, big tech has grown immensely over the last few years. Its combined weight in the S&P 500 Index has more than doubled from roughly 8% in 2015. Today, FAMAGs make up 20% of the index in terms of market capitalization. This means these five stocks account for a larger slice of the market than the five largest stocks at the peak of the dot-com bubble did in 1999.” During the crisis, these stocks have outperformed the Index and risen by an average of 32%; with Amazon and Apple leading the way, up 63% and 33% respectively (through July 15). When you look at the S&P 500 being negative ~1% for the year, this is a bit misleading if you’re looking for a general pulse on the markets. Of the 503 companies, 335 companies are negative YTD (through July 15), and 168 companies are positive. The best performing stock is outperforming the worst performing by 160%³; we are not joking when we said there will be “winners and losers” as we climb our way out of this. This is a prime example of why we believe diversifications pays over long periods of time. Sean Markowicz also said, “Dominant firms seldom maintain their dominance over time. Half of all market leaders fall out of the top 10% during each business cycle, according to the McKinsey Global Institute. Think of Nokia and BlackBerry. We all used to own one, but their market share has evaporated into thin air. There is another study by investment manager Research Affiliates. It found that once companies achieve a dominant status, they have historically underperformed the market and their industry. They call it the winner’s curse².”

 

The labor market is experiencing an unprecedented shock due to the impacts of social distancing measures. The more important question is, how much of the unemployment will prove to be temporary versus permanent? Many unemployment claims are from workers who have been furloughed rather than fired. Job losses designated as permanent are much lower than those considered temporary. However, permanent job losses have reached the levels seen at the height of the early 90’s and early 2000’s recessions, as seen in the figure below. Ultimately, the level of unemployment will be determined by the number of businesses that are unable to survive the crisis⁵ and what industries will recover.

The good news is that total nonfarm payroll employment rose by 4.8 million in June, and the unemployment rate declined to 11.1% according to the U.S. Bureau of Labor Statistics. This follows May numbers when the expectation was another loss of jobs by 8 million. When in reality, 2.5 million jobs were added in May.

We have learned the past few months there is no “silver bullet” to reopening, and it’s a learning process for everyone. I am optimistic and impressed by all of the innovation that has occurred. Businesses and individuals are forced to think in different ways, and for some, it will make their business stronger, post-pandemic. I love seeing companies take the initiative and do what needs to be done. Gym closed? Move the workout to outside or provide virtually. Can’t dine in? Let’s close the street and move all of the dining tables on the street. Some of the most innovative companies came out of a recessionary period. Anyone heard of Uber? Uber was founded at the market bottom in March 2009. As of 2019, Uber was estimated to have over 110 million worldwide users and a 67% market share in the United States. Let us remain optimistic because the future is bright, and we are excited to be a part of it, sharing in our clients experiences every step of the way. I’m betting on America; it hasn’t let me down yet.

If you would like to discuss your long-term financial plan in greater detail, please contact our office to schedule time with one of our wealth advisors. If you are not currently a client and value a second opinion, please contact our office at (888) 775-0950. Now is a better time than ever to look at your current investments and financial plan to make sure they are properly positioned for the unexpected.

Regards,

Jerrod Ferguson & the Vance Wealth Investment Committee

Sources:

1. Treasury.gov – Daily Treasury Yield Curve Rates
2. Hartford Funds – Big Tech vs. the Market: What You Need to Know (Third Quarter 2020)
3. Factset, data as of May 14, 2020
4. MFS – By the Numbers, July 13, 2020
5. T. Rowe Price – Global Market Environment, Haver Analytics/U.S. Department of Labor
   1. Labor
6. Disclosures: Any opinions are those of the author and not necessarily those of Vance Wealth. Expressions of opinions are as of this date and subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Asset allocation and diversification do not ensure a profit or protect against a loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Indices are not available for direct investment.