Skip to main content

Sound Advice: June 3, 2020

Economists

“The First Law of Economists:  For every economist, there exists an equal and opposite economist. The Second Law of Economists: They're both wrong.”
Only a few short months ago, during an online seminar for financial professionals, Joe Davis, Vanguard’s Chief Global Economist and head of Vanguard’s Global Investment Strategy Group, said there would be no recession in 2020.  
Back in January, Jeremy Siegel, the well-known finance professor from the University of Pennsylvania’s Wharton School, waxed enthusiastic about valuations of stocks in the 20 times earnings range and he looked for even more annual gains ahead.
They were both wrong.
Approaching midyear, we are in a marked recession that is not going away anytime soon, despite the hefty, albeit temporary, rebound in market averages in April and May.  Five weeks or so from now, earnings reports for the second calendar quarter will start to be released.  The comparisons will be dreadful.  
Despite relaxation of social distancing rules in some parts of the country, there is every reason to expect more bad news from Corporate America for at least the remainder of this year . . . and possibly beyond.
The damage will not be universal.  Due to extended periods of social isolation, digital communication and the technology that supports it will prosper.  Brick-and-mortar retail stores will be hammered, but e-commerce sales will continue to soar, as they have already.  Wherever there is demand for interaction, whether social or commercial, the cyber world will benefit.
What will separate the fortunate businesses from those that are struggling will be the degree of risk associated with each and the prospect of an imminent treatment and/or vaccine.  No doubt there will be one, but the question is when.  My guess is that it will be early-to-mid 2021, but even that is based on an acceleration of medical research and testing requiring considerable optimism.
Our economic rebound will begin when people regain the confidence needed to resume activities that had been the mainstays of their lives.  It is not confidence that prompts us now to go to supermarkets, pharmacies, and gas stations.  It is basic need for which there are few, if any, options.
In some parts of the country, restaurants are opening (with sharply defined spacing between tables) and public areas are beckoning as warm weather returns.  This is good news and bad news.  The risk of infection is as high as ever and the reality is that nothing has changed other than the season.
As colder weather sets in this coming fall, the situation will not be much different from what we have just gone through.  The current period of opening up may well lead to an accelerated rate of new infection by autumn along with no near-term progress on treatments.
Unfortunately, the latest news is that the mid-May announcement by Moderna of early progress on initial testing of a new vaccine, which was accompanied by a major offering of Moderna stock, is now under investigation by federal securities regulators.
Let’s not forget the huge number of unemployed people, over 40 million as of last week.  Although the majority of them expect that their layoffs will be temporary, we have seen estimates that suggest 40% will be permanently out of work.  When you read the news about nationwide rioting, keep in mind the probability that this undercurrent is a driving force behind unrest and will continue into the future.

N. Russell Wayne, CFP®
www.soundasset.blogspot.com

Comments

Popular posts from this blog

Sound Advice: July 8, 2020

Jobs Are Up, But So Are New Infections Through the spring months, m ost of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent. We are now in a recession.   The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic.  The big question is: When will this recession end? Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity. Still, not all is rosy.   In his recent testimo

Sound Advice: May 13, 2020

Reality Check On the heels of the market plunge of late February and most of March, investors did a sharp about-face in April, bidding up shares at one of the fastest rates in recent history.  Although this recovery probably provided at least temporary comfort from the plunge, it would be unreasonable to view the rebound as a sign that things are all better.  They are not. For one thing, we are now in the midst of earnings reason, when companies report their quarterly results.  Some may have good news for the March quarter, but as we move through the current calendar quarter, only a few will be able to show continuing improvement.  Against the broad backdrop of U.S. business history, the months just ahead will almost certainly prove to be among the worst, from the standpoint of year-to-year comparison. With more than 30 million people filing claims for unemployment insurance, it would be difficult to expect anything other than bad economic news.  Who knows how many of these

Sound Advice: July 22, 2020

Fixed Income: In a Fix Typically, the construction of an investment portfolio has begun with an approximate balance of 60% in equities and 40% in fixed income instruments.   Fixed income generally means bonds, but that includes bond funds and exchange-traded funds holding bonds.   The equity portion is intended to be the driver of capital appreciation over extended periods of time and the fixed income portion is supposed to provide stable, albeit more moderate ongoing rates of return. The theory behind this approach is that as the time periods measured have lengthened, the relative risk of holding equities has diminished while the returns they have generated have been higher than those of other asset classes.   What equities do in the short term, even a year or two, is often anybody’s guess.    To the extent that fundamental analysis can help toward determining future equity values, investors need to look ahead three, four, five years or more before reasonably expecting t